Tuesday, September 23, 2008

A Possible Explanation for the Gas Shortages?

I can't stop thinking about what would cause these gasoline shortages in Atlanta and Nashville. Why won't retailers raise their prices? My first suspicion was threats by state governments to punish price gouging, but then, why is this happening in Nashville and Atlanta, but not Knoxville and Macon? 

Another possibility is that it has to do with the population--the more people there are, the more likely it is that someone will spot rising prices and raise a price gouging complaint. The problem with this is that it now seems that Tallahassee is experiencing a shortage, too. That is quite interesting, because Tallahassee has something in common with Nashville and Atlanta: It is a state capital. Why would that matter? Governors--the ones issuing statements warning gas stations not to engage in price-gouging--live and work in state capitals. Could proximity to the regulatory authority be the cause of reluctance to raise prices in these cities? Tallahassee authorities are certainly investigating price gouging, although I can't find any advance announcment that they would do so  (state authorities in Nashville and Atlanta announced that they would not tolerate price gouging when hurricane Ike hit). 

This is a nice explanation, since Tallahassee is smaller in population than several other cities in Florida--the "number of eyes watching for price gouging" explanation doesn't work, but the "proximity to regulatory authority" explanation does. Unfortunately, the sample size is small (only three cities have experienced shortage), so I can't rigorously test this. and I still can't explain why only these state capitals have experienced shortages. If we see similar shortages in Montgomery, Alabama or another southern state capital, then I would be nonetheless inclined to believe that this is the explanation. Montgomery would be a nice example, since Birmingham is bigger.

I've been thinking about calling some Nashville gas stations and asking why they don't raise prices, but I can't help but think they'll be unwilling to talk to me. I probably wouldn't even get the owner on the phone. 

7 comments:

Lee said...

According to a friend of mine that is sort of in the transportation/infrastructure business gas stations in Atlanta sell a slightly different mix of fuel than elsewhere to help the city meet EPA guidelines and that special mix only comes from certain refineries, all of which are near Galveston.

da bear said...

My hypothesis is this...

At any given point of time, we would expect the average gas tank to be roughly half full. As people have not coordinated when they fill up, an even daily flow can be predicted. When there was talk of gas shortages, people went out immediately to top off their tank, this means that demand increased dramatically so that the average tank was well over normal. This run on gas is not a result of a shortage, but instead people being overly cautious.

In addition, because gas stations ran out of gas, people then drove looking for gas (wasting gas) and when they found a station with gas they idled in line (wasting even more gas). So gas usage increased as did the need to hedge their reserves, both factors putting a heavy pull on stations. In addition, seeing people in line to fill up makes others want to do the same, creating a bandwagon effect.

Those are my thoughts.

- Paul Yacoubian

Mike Hammock said...

Lee correctly points out that Atlanta has a special blend of summer gas (as do several cities). This is used to address the larger impact of car emissions in warm weather. It is true that there are a limited number of refineries that produce this gasoline. The problem is that this still doesn't explain a shortage--prices can adjust to prevent shortages from happening. The real question is why prices haven't adjusted. They should be rising faster than they are. And why are Nashville, Atlanta, and Tallahassee all experiencing shortages? It is possible that all three are experiencing shortages around the same time for different and unrelated reasons, but this seems unlikely.

Paul correctly points out that there has been run on gasoline because people are topping off their tanks, even if they're only half empty. He correctly points out that this is an increase in demand, and that people are being overly cautious. Again, however, this cannot explain the lines of people waiting at gas stations, and gas stations that have no gasoline. That is to say, Paul's argument suggests that we should see very expensive gasoline. That's what usually happens when demand jumps up. Instead, we are seeing stable or falling gasoline prices, and a gap between quantity demanded and quantity supplied. Why?

da bear said...

It's possible that station owners are scared of being reprimanded for "price-gouging" by the media and the negativity that may result from loyal customers if they do raise the prices to where they should be.

da bear said...

Futhermore, the reason Memphis did not experience shortages but Nashville did is that the average Memphian did not have the financial resources to afford to top off his or her tank, whereas people in Nashville did. This is a generalization.

- Paul

Mike Hammock said...

The price-gouging story makes some sense. I'm not sure about the explanation that Memphians couldn't afford to top off their tanks. If that were the case, we should expect to see shortages in the wealthy suburbs, and I don't think we are.

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