Saturday, September 20, 2008

Nashville's Bizarre Gas Shortage

Gas shortages were common in the late 1970s due to government price controls. The federal government imposed price ceilings, which meant that gas stations could not raise their prices enough to deter some buyers from buying gas, while at the same time the supply of gas was falling (due to action by OPEC) . As a result, people continued buying gas until the gas ran out.

There are no such price controls today. Yet 85% of Nashville's gas stations have apparently sold out. The reasons for this are disputed. CNN claims that a rumor started that Nashville was running out of gas, causing a run on gas stations. Other news sources suggest that a pipeline is not running at full capacity due to the recent Hurricane Ike.

Even if both these things were true, they still can't explain the shortages. The reason the shortage is puzzling is that it's not clear why gas stations didn't just raise their prices. Raising prices in the face of increased scarcity communicates this scarcity to buyers, inducing them to reduce their consumption. Some consumers who were buying gasoline "just in case" might change their mind if they arrived at the station to find that gasoline was up to $5.00 per gallon.

My first guess was that there was some kind of sabre-rattling against price gouging by the city government, that had frightened the local gas stations into freezing prices. There is some evidence of this, but it seems weak to me (the sabre-rattling was state-wide; why is this problem only in Nashville?). Even stranger, the price of gas here has apparently fallen! This is extremely weird. The gas stations are giving up an opportunity to charge higher prices and avoid shortages. Why? If there's one thing Nashville drivers need now, it's higher gas prices. If you want to learn more about the equilibrating role of prices when crises occur, you might enjoy this Econtalk podcast with Mike Munger.

I have to drive from Nashville to Memphis on Monday morning. I hope that the situation has relaxed somewhat by then, as I only have enough gas in my tank to go about 90 miles. The drive is around 200 miles. I may end up taking my wife's Prius instead of my Mazda 3.

UPDATE: Jonathan Nation informed me that Knoxville has apparently had some strange behavior recently. There was a rapid spike, followed by a quick drop--exactly what should have happened in Nashville. What accounts for the difference? I don't know.

1 comment:

Andy said...

Atlanta is having a shortage as well. It started yesterday, and lines were forming at stations this morning.

I wondered this originally after reading your blog on Friday: since many more people drive past gas stations than stop in them, perhaps station owners are worried about getting bad publicity. After all, what would scream "price gouging" more than being the only station on the block with gas left, at $5.50 a gallon, while all the other stations are out of gas at $4.50? Maybe the $5.50 station would win for the day, but lose in the long run if customers don't return there after the gas returns to normal prices. I can imagine that being the (perhaps irrational) response. Everyone else kept their prices low and ran out, why shouldn't I?