It Isn’t Always Price Gouging

Gasoline prices are on the rise in the wake of Hurricane Harvey, leading to charges of price gouging from angry consumers. But the alternative to rising prices may be worse.

As some gasoline stations in Texas report gasoline shortages, a motorist in Austin was observed filling up plastic trash cans with gasoline in Austin, Texas on August 31, 2017. (Note that this is extremely dangerous and should not be replicated). Photo by Miguel Jimenez.

As gas stations raise prices in the wake of Hurricane Harvey, there have been numerous accusations of price gouging. Especially on social media, some are quick to conclude price gouging if they see gasoline prices go up by 10 or 20 cents per gallon over the course of a couple of days.

At the same time, there are widespread reports of gasoline hoarding, even as reports of shortages were spreading across Texas. The photo above, which has been widely circulated on social media, shows a motorist in Texas putting gasoline in two plastic trash cans in the back of his pickup (which, to be clear, is extremely dangerous). I tracked down the photographer — Miguel Jimenez — to obtain permission to use the photo. He confirmed this incident took place at the gas station located next to his Nomad Bar in Austin.

These issues — gouging, hoarding, and shortages — are all interrelated, and they demonstrate why the issue of price gouging isn’t always as simple it seems.

Here are the options that a gas station may face. If a service station’s gasoline inventories are depleting at a faster than normal pace (for example, deliveries are delayed), they have three choices. One, they can do nothing and just hope they don’t run out of fuel. Two, they can raise prices to slow down demand (especially from those who are hoarding gasoline) and to provide an incentive for more supplies to flow into the region. Or three, they can ration gasoline.

There are disadvantages of each approach.

In most cases, a station will opt to raise prices. This, effectively, is rationing by price. It provides a disincentive against hoarding while stretching gasoline supplies for those who really need it. The downside is that it will make many people angry as they find themselves paying more for gasoline. They will generally conclude gouging. But keep in mind that the alternatives are that the station may have no gasoline to sell unless they raise prices, or they will limit how much consumers can buy.

We have seen all three approaches and the consequences of each. Many stations who didn’t raise prices either ran out of gas or are now being forced to raise prices as other stations run out and their demand goes up. Those that ration must often contend with long lines of customers who are only getting a partial fill.

When is “gouging” not really gouging? I would not consider it price gouging if a service station raises prices because either 1). They are legitimately concerned about running out of fuel before they are resupplied, or 2). Their supplier raised prices, and they are passing on that cost.

There is an exception to this rule of thumb. If a service station has no real worries about its gasoline supplies and is only raising prices to take advantage of the situation, then I would consider that price gouging.

However, note that even this situation comes with a caveat. If there is one supplier who has a steady supply of gasoline while everyone else is running out, that supplier will suddenly see a huge spike in its demand. As long as it can continue to feed that demand, that supplier may have a difficulty justifying any “need” to raise prices in response to a complaint. But as soon as its supplies begin to deplete faster than they can be replenished, it will have to make a choice to raise prices, ration, or risk running out of fuel.

So don’t presume that a gas station is gouging just because they raise prices. It’s fine to register a complaint, but often these complaints are resolved in favor of the supplier when they show that the price increase was justified because demand began to outstrip supplies.

Without a doubt, this does cost money for consumers. At the same time, refiners and fuel marketers are making money from this situation – provided they can continue to supply product to the market. Otherwise, the increase in gasoline prices is unlikely to be compensated by the loss of production.

Note: Let me be clear that this article isn’t a “defense” of price gouging, but rather an explanation for why raising prices in a disaster isn’t always as simple as just price gouging. Some readers jump in and comment simply based on the title, but I am trying to provide more background about what is often going on in these situations.

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7 thoughts on “It Isn’t Always Price Gouging”

  1. Kind of old, but I get the impression you did not completely understand the definition of lease condensate. It refers to liquid hydrocarbon stream at the wellhead (in the three phase separator). Lease condensate is just the oil from a primarily gas stream. (But this is an arbitrary designation, what we consider mostly oil wells with some gas along and what we consider mostly gas wells with some oil along.) But the bottom line is the “crude” and the “lease condensate” are each coming out of the 3 phase separator at the middle takeoff (water below and natgas above).

    NGLs are primarily gasses actually (C2, C3, linear and branched C4). However, there is also some C5+, that is separated out in the refrig facility. This is called plant condensate. It is legally different than lease condensate. But is a liquid hydrocarbon (usually pretty high API, 60+).

    If you look at it with a chemE flow diagram, you go from well to 3 phase separator (at the wellhead usually). This is not a refrigeration facility and is a rough separation. From there water goes to treatment, oil (whether called crude or condensate) goes to oil tanks and oil transport, and the gases (containing some mix of C1, plus NGLs, plus nonvaluable impurities like CO2, N2, H2O vapor) head off for refrigeration separation. So plant condensate is actually like a second and firmer squeeze. [Of course, there is also some residual C1 in the oil, that is separated in the refinery distillation tower.]

    http://www.energytrendsinsider.com/2012/03/01/natural-gas-liquids-and-algae-as-fuel-r-squared-energy-tv-ep-13/

    All, very basic, but you did not seem 100% on the definitions in the answers to questions on that old thread. Really no mystery to need to check with EIA on.

    1. “Kind of old, but I get the impression you did not completely understand the definition of lease condensate.”

      Not sure what I said, and don’t have enough time right now to review the video. It’s possible I misspoke, but I deal with lease condensate all the time. My company makes a unit that converts NGLs into methane via a reforming and SNG process.

  2. OT:

    From Forbes:

    “China is mulling a ban on cars that run on fossil fuels, Xinhua news agency reported on Monday. In a move to both clean up its notoriously bad air in Beijing and Shanghai, and promote the development of “smart cars” and electric vehicle makers like BYD, the central planners of Beijing are likely thinking that bans on gas guzzlers will entice more electric vehicle production and its related infrastructure like plug-in charging stations at gas stops. BYD Company (HKG: 1211) rose 4.55% on the news. Tesla did the same.

    This is good news, after all. Not only is it positive for the Chinese who live in some of the most polluted cities in the world, but it is also meaningful for the future of China’s massive auto industry. This is a way to develop the industry, while sticking to Xi Jinping’s promise to green up China’s dirty, fossil fuel beast of an economy.”

    —30—

    This news from Forbes follows news from GS Yuasa that they will introduce a car battery with double the range by 2020.

    I have long pondered if China, which mandates battery motorcycles, would do the same with cars. Looks possible now.

    Up next is India. If India follows suit, and if oil demand keeps falling in Europe and Japan as it has since 1979, we may yet see Peak Demand.

  3. Interesting remarks by James Griffin (see video linked, start at 29:45)

    https://www.youtube.com/watch?v=G_BpEqZ15zQ

    Listen especially at the end, where he talks about OPEC strategy. He basically says that OPEC can’t drive prices much above 60 or 70 because shale will explode. But that shale can’t drive us sub 40. And basically that OPEC can have a moderate effect of 10 buck or so in the 40-60 band (and that this is still useful to them.) I think this is basically how things have played out.

    I think his take on the Saudis is a little different than yours, which shortly after the price crash, seemed to argue they should have cut and defended the very high prices, presumably because shale reserves would run out shortly.

    1. “I think his take on the Saudis is a little different than yours, which shortly after the price crash, seemed to argue they should have cut and defended the very high prices, presumably because shale reserves would run out shortly.”

      That’s exactly what I think they should have done. It was a risk because if shale production kept rising it wouldn’t have worked. I thought that maybe they would have had to make a couple of rounds of cuts, and then maybe shale production would have flattened and started to fall. But if it could rise another 3-5 million BPD, there really wasn’t anything OPEC could do.

  4. 1. Yeah, just a well stated opposite view. Think it was interesting. Worth you listening to it. Even if the guy is an Aggie. 😉

    Also there was an important within-cartel dynamic that Saudis had to manage. Got the rest of the cartel to share some of the cuts and even roped in Russia. And I don’t pretend that the others are participating perfectly, but before they weren’t even willing to lie, let alone cut!

    2. In same vein, nice paper on TO response to higher prices. You don’t have to read all the gobbledigook. Just check out the conclusion and figure 8. About an extra 2 MM bpd in 2 years if $80 is defended (extrapolates to 3.MM bpd in 2 years if $100 is defended).

    http://www.rff.org/files/document/file/RFF-DP-16-32.pdf

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