Why Gas Prices Spiked Before Hurricane Ike

It's not a Big Oil Conspiracy:

Here's how it worked. The Knoxville area has several bulk fuel storage depots. Some belong to the chain outfits, others are run by wholesalers that supply independent gas stations. In either case, they manage their storage levels to maintain a competitive retail price. When the price of gas is rising, they maintain a relatively full inventory. This means that on average the gas they store always costs less than the current spot price. On the other hand, when gas prices are dropping, they keep inventories low, so they aren't holding a lot of gas that cost them more than the market price.

It's the exact same thing you do to minimize how much you pay for gas. If the price is going up, you fill up in the morning before the price changes go into effect, and you fill the tank full. When the price is going down, you guy your gas in the afternoon, after the price changes, and you buy just what you need. The wholesalers and bulk storage facilities do exactly the same thing, except on a much larger scale. Gas prices have been plummeting lately, so all of the bulk storage facilities have been keeping their stocks low.

Then along came Gustav, which impacted the ability of refineries to deliver fuel to the regional and local bulk storage facilities. That hasn't been a huge deal because they were drawing down their stocks anyway. But now Ike is headed for Galveston, and the pipelines are being shut down completely. And that is where the fertilizer hits the propeller. When you're in a low stock condition, you are relying on a steady flow of gasoline to maintain smooth distribution. When that steady flow is disrupted, you're only hours away from shortages.

It's been more than a few hours, and shortages are already here.

So the price of a gallon of gas is skyrocketing, even at stations, like Pilot, that have enough gas to get through the interruption without going dry. So why are they raising their prices? Aren't they gouging?

Nope. If you've been out in Knoxville at all today, you've seen long lines of cars at gas stations. You've seen people filling up cars, trucks, motorcycles, lawnmowers and gas cans. They are in a panic mode, and they're buying more gas than usual. Even though Pilot has enough to get through the crisis at normal levels of sales, there's no way they can sustain sales at the rate they are going. So what do they do? They raise prices. By raising prices, they discourage people with brains from buying more gas than they need. They discourage people from driving more than they need to. In effect, they are encouraging conservation by using market forces rather than governmental coercion.

And it will work.

Consider the opposite case, where gas prices remain low, and everybody fills every container they can get their hands on with gas, and the stations run dry for the next three days. What happens when an ambulance needs to gas up? What happens when a fire truck needs fueling? What happens when you have an emergency and you need fuel but can't get any because everybody and his brother is hoarding it?

There are two ways to ration a short supply of a commodity. You allow the market to price it accordingly, and those who really need it will buy it, or you let the government come in and set the price. As a small government supporter, I favor the former. We're still dealing with the fallout of Nixon's wage and price controls from 40 years ago.

Anyway, that's what happened. Bulk storage facilities were acting to minimize the price of fuel and got caught short when the supply was interrupted. Barring major damage from Ike, supplies should be flowing again in a couple of days, and prices will resume their freefall.