Wednesday, August 31, 2005

Gas Prices Need to Rise Faster!

There's often a pretty simple principle at work when stores raise prices in the aftermath of natural disasters: Their supply chain is interrupted too. This article quotes a gas station owner in Muncie, Indiana, who had a three-day supply of gas in his tanks on Monday. For the past two days he could only buy 40 percent of his normal daily volume. He needs a steep price increase just to keep paying his bills. Let's say he normally sells 5,000 gallons of gas per day (I'm making these numbers up), earning a gross profit of 25 cents per gallon, or $1,250 per day. From this he pays $750 of overhead--rent, taxes, employee salaries, maintenance, etc--to keep his station running, leaving $500 of net profit with which he can improve his business (new state-of-the-art touchless carwashes and such) and pay his own living expenses. Along comes a hurricane which disrupts the entire supply chain, and he can only buy 2,000 gallons of gas per day. He needs to earn $750 per day just to break even, which works out to 37 cents for each gallon of gas in his daily inventory. He still needs to feed his family so he bumps up the price another 10 cents to earn a net profit of $200 per day. This is on top of his suppliers' own 25 cent price increase. Voila! He's an evil price gouger responsible for a 47 cent price hike with TV stations shooting his marquee for their stock high-gas-price-stories and politicians accusing him of criminal conduct. Meanwhile the station owner is living on 40 percent of his normal income, knowing that if his supply dries up completely for a few days he won't be able to pay his mortgage. On the demand side are those who rush out to fill up four 55-gallon drums with gas at the first hint of a shortage (described in the same article). This gas will likely sit in someone's garage while other people wait in line for 20 gallons to make it to work for the week. A faster price increase cuts down on such hoarding and waste. If the 55-gallon-drum-guy really needs 220 gallons of gas--maybe he's a business owner himself with a small fleet of trucks to run--he will gladly pay the higher price. Otherwise, he's more likely to leave the gas available for someone who needs it.

People who complain about price gouging and demand price controls are really asking for someone else to bear all the pain of a disaster rather than letting market pricing spread the pain equally.

1 comment:

Kate said...

Good stuff - now I get it.
Afterall, we all need to survive!