Price Gouging and Keynesians in Drag

From Florida to Tennessee, and all the way up to Connecticut, people far from Hurricane Ike’s destruction nonetheless felt one of its tell-tale aftershocks: gasoline prices that surged overnight — to nearly $5 a gallon in some places.

Fears of supply shortages, and actual fuel-production disruptions, resulting from Ike’s lashing of vital energy infrastructure led to pump price disparities of as much as $1 a gallon in some states, and even on some blocks.

My Comment: That is the free market at work, or would be if government would get out of the way. Anyone charging $1 more that a station a block away is not going to get much business at least as long as the lower priced station has gas. Perhaps the station charging $1 more is nearly out, knowing a shipment is not coming soon.

The price of regular gasoline soared as high as $4.99 a gallon in Knoxville, Tenn. on Saturday, up from $3.66 a day earlier.

In Florida, the attorney general’s office reported prices as high as $5.50 a gallon in Tallahassee and said it had received 186 gouging complaints.

Gov. Charles Crist said on Friday that $5 a gallon "can only be described as unconscionable" and added: "Raising rates to exorbitant levels like this only causes unnecessary panic and fear. This type of behavior will not be tolerated."

My Comment: Florida governor Charles Crist is acting like a clueless socialist.

In Connecticut, AAA said average prices jumped 10 cents overnight and Attorney General Richard Blumenthal said his office had received complaints of stations charging more than they advertised, raising prices more than twice in a single day and other problems.

"A lot of it is simply incredible," Blumenthal said, "and a lot of the price increases make no sense economically in terms of supply and demand."

My Comment: So now it’s wrong to raise prices more than once a day? Add Richard Blumenthal to the long and growing list of bureaucratic clowns who do not understand free market constructs.

Prices in California on Saturday ranged from $3.49 to $4.39 per gallon. In the eastern suburbs of Cleveland, gasoline jumped from $3.55 early in the week to $3.79. Regular gasoline at Chicago-area stations averaged $4.12 a gallon.

The price jumps came after the wholesale price of gasoline soared to $4.85 a gallon Friday in anticipation of Ike’s arrival.

Many stations have contracts to buy gas from suppliers based on prices set by those markets, said Tom Kloza, chief oil analyst with the Oil Price Information Service.

"They aren’t gouging; they are simply passing along the wholesale cost," he said. However, a small percentage of stations owned by major oil companies are somewhat insulated from these forces, enabling them to keep prices lower.

My Comment: Finally, a sensible comment from someone.

In Knoxville, Tenn., account executive Sharon Cawood said "one of our local gasoline chains called a local TV station Thursday, sometime during the day and said, ‘We’re running out of gas. We’re going up 80 cents a gallon… It caused a major scare.

"By the time it hit 6 o’clock news and 11 o’clock news it was like snow was falling and milk and bread were flying off the shelves."

Larry Daugherty, a talk radio host Knoxville’s WQBB, said a steady stream of calls began Friday morning from people perplexed about price discrepancies.

People reported gas was selling for as low as $3.49 a gallon in some spots, and $5 at another.

"People are outraged," Daugherty said. "Everyone is having a hard time understanding all of this."

My Comment: The reason they are having a hard time understanding what’s going on is clueless governors like Charles Crist and Connecticut Attorney General Richard Blumenthal, do not understand pipeline delays, supply and demand issues, or simple free market constructs. Instead we see investigations of price gouging.

Such market fundamentals could last for another few weeks, depending on how quickly Texas and Louisiana refineries shuttered by Ike can come back on line. "It’s a mess," Kloza said.

Ike shut down 14 Texas refineries with a total capacity of 3.8 million barrels of crude a day, or about 20 percent of the country’s total output.

My Comment: To expect there to be no disruptions, supply shortages, or price hikes in this situation is beyond stupid. Perhaps the department of Energy should have explained this to all the governors. Then again, the department of energy is proving to be useless and should be disbanded just as Ron Paul suggested long ago.

Still, states promised to take action to prevent price gouging, and the Environmental Protection Agency temporarily waived a dozen states’ fuel-blending requirements aimed at minimizing air pollution. The action makes it easier for them to use foreign imports.

"The Department of Energy and state authorities will be monitoring a gasoline crisis so consumers are not being gouged," President Bush said.

My Comment: There you have it. The department of energy is wasting resources investigating price gouging instead of doing anything useful.

The Sabine Pipe Line, a crucial natural gas conduit, has also been shut down. The CME Group, parent of the New York Mercantile Exchange, declared a force Majeure for all remaining delivery obligations for September natural gas contracts.

My Comment: Look for increasing natural gas prices. If those prices do not stick, do not blame manipulation. Instead, look at decreasing demand in a rapidly slowing economy, weather influences, and the like.

Reuters is reporting Crude, products down after Ike’s Texas strike.

U.S. crude oil futures fell more than $1 on Sunday, dropping below $100 a barrel as dealers bet Hurricane Ike did less damage to the nation’s oil infrastructure than initially feared.

RBOB gasoline and heating oil futures also fell sharply on Sunday as electronic trading on the Globex platform opened early.

"The oil market is selling off because the early indications show Ike didn’t do as much damage as feared," said Chris Jarvis, senior analyst at Caprock Risk Management. "That said, this sell-off could prove to be a bit premature, since it could be a while before things get back to normal. Restoring power to the refineries is going to be a problem."

That crude future are falling while gasoline spot prices are rising is no doubt going to be offered as proof of manipulation and/or gouging. The reality is that neither is true. Crude futures should fall for two reasons: Short term refinery outages means less short-term (very short term) demand for crude. Long term, the global economy is rapidly sliding towards recession. Crude prices and commodity prices in general should be expected to drop.

Gary North had an interesting article on Lew Rockwell called Reefer Madness and Subsidy Madness. Here are a few snips.

Over and over, we see the same pattern: government intervention distorts the free market, which then results in unforeseen negative consequences. When I say unforeseen, I mean "unforeseen by the politicians and bureaucrats." Also, "unforeseen by the libertarian cheerleaders who told the public that it was necessary that the government intervene." The ex-atheists in foxholes are closer to the truth than the ex-libertarians during meltdowns. There is a God, but there are no successful solutions from government intervention during the meltdown. The government merely kicks the can down the road again. The errors increase. The negative feedback from the market, which would have reduced the errors, is not allowed to function. Whatever the problem was that the government was attempting to solve escalates. The next crisis will be worse. Then, once again, the libertarian cheerleaders will stand behind the government and tell their constituents that it is sad that this was necessary, but there is no question that it was necessary.

These people never learn. They are not believers in the free market. They are believers in the mixed economy. They are Keynesians in drag.

Let’s not kid ourselves. This bailout is a subsidy to the suppliers of homes. It is a subsidy to the few surviving homebuilders, to people who own homes, and to people who may want to sell their home to buy an even bigger home later on.

This is an assault on home buyers. It is an assault on anyone who has saved 20% down payment and who wants to buy a reasonably priced home, so that his monthly payments will total a little more than what he has to pay in rent. He wants to move up from renting to home ownership. But, because about two-thirds of Americans are already home owners, and about half of these are in debt to lenders, and something like 40% of these indebted people in a year will find that they are underwater, the government intervenes in order to bail them out.

The government tells voters that this is a pro-ownership intervention. It is pro-ownership in the sense that it is a bailout of millions of people who were lured into making a hoped-for investment that the free market would have priced out of their price range. The free market would have required a larger down payment. It would have established a shorter payoff period. It would have allowed renters who could afford to buy a home to buy one. But, instead, the government intervention lowered the terms of entry, and thereby raised the retail price of housing.

Those interested in economic forces vs. manipulation might also wish to consider Gary North’s article Ted Butler Never Had a Clue About Silver.

Mike "Mish" Shedlock