Wednesday, September 17, 2008

Stop Supply Gouging Me

Or maybe I should say: Please Price Gouge Me! Either way, I've been pretty frustrated with the recent accusations of criminal increases in gas prices. My new home state of North Carolina has recently implemented price gouging laws to "protect” consumers from predatory pricing. Here are my criticisms of their criticisms:

"The prices are ridiculous. No one can afford them. The lines are out in the street.”

No one can afford it yet there are lines out the door? Sounds to me like a sale not a rip off.

"That's not what they paid for it. It just seems to me they shouldn't raise the price until they have to pay for it"

So maybe you and the thousands of other people rushing out to top off their tanks shouldn’t react until then either.

"The BP ran out of gas late Friday afternoon, which helped quiet the frenzy – until a tanker arrived to replenish the pumps.”

This is the consequence of gas stations not raising their prices high enough and fast enough. Would you rather pay $5 for gas today or have no gas tomorrow?

"I encourage gas stations to avoid panic price increases and consumers to avoid panic fill-ups."

There is no reason to encourage anyone to do anything. Let the strain on supply be shown in high prices and let people decide for themselves.

But let’s suppose for a moment businesses really are taking advantage of misinformation and panic. Do we really want to live in a country where the government can tell business owners what prices they can charge? And especially in an industry as competitive as gas stations (can you think of any other product that shows its prices on hundred foot high signs?) Like most issues of the free market, this is not only an issue of resource allocation, but an issue of liberty. These businesses are financed, operated, and owned by private citizens. It is their prerogative to charge what they see fit.

Sadly this is not harmless political pandering. There have been seven subpoenas served in North Carolina to stations accused of overpricing. They could pay up to a $5,000 fine. The Governor Mike Easley has declared “we're going to be on top of this. We're not going to let price-gouging happen in North Carolina.” Sir, I would prefer you turn your attention to your own government, whose threats have deterred stations from raising prices, ensuring that I am supply gouged.

Update: Maybe there should be some laws against price gouging on cigars.

12 comments:

  1. Totally agree. I am torn however on price gouging laws during emergencies. Flordia has laws in place to prevent stores from hiking food and gas prices when a hurricane hits. That seems reasonable to me. Making money off of people fleeing their homes from a hurricane seems greedy and evil. However, not everyone agrees.

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  2. Graydon7:16 PM

    I feel like the beef with the gas prices and oil companies is that the supply of oil and therefore is being limited in a dishonest way. Demand for gasoline of course remains high, meanwhile the oil companies seem to be artificially limiting the supply of oil which drives the price up. If the oil companies when be fair in there efficiency of supplying oil, then it wouldn't drive price up to "gouge" level. I guess my point is, the price of gas is fair as far as the supply and demand factor is concerned, it's the supply part that has people peeved because they feel the oil companies are being dishonest with that part. Where am I going, in your opinion?

    As far as government intervention goes, I agree the governement shouldn't be deciding what price to charge for such things, but the government does have an obligation to protect us. In my opinion that would include investigating to see if there has been any dishonest business practices in the oil companies, and putting some sort of regulations on how the oil companies and the speculators affect the supply and price of oil. For example, the oil companies should have standards to maintain in their efficiency of their refineries, and speculators should be forced to put some substantial capital up front when they are making their "bets" and manipulatig a market that is so vital to national security and to basic survival. What do you think?

    Sorry I haven't kept up with the blog in a while...life has gotten busy, but will hopefully be slowing down soon, because in a couple of weeks I'm going to only have 1 job instead of 2 for the first time in, well, years! They offered me a full-time job at First Pres, and promptly put in my notice at BI-LO! I'll call you soon to chat it up...hope y'all are doing awesome...

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  3. H,

    Nice post. I will link to it later. I love the concept of supply gouging. Is that an H original?

    Justin, are you still okay with the Florida law if the effect is that there is no food on the shelves and gas in the pumps. Because that is exactly the effect. So which is better, no food and gasoline with no greedy exploiting businesses or gas and food available provided by greedy exploiting businesses. That's your trade off. Which would you choose? That is an easy choice for me. Bring on the greed.

    Graydon, your comment is rather incoherent. How are the oil companies artificially limiting supply? When demand is high and prices are high, it provides incentives for producers to bring more supply to the market to take advantage of the high price. Two things probably do play a role in artificially limiting supply, cartels and limited refining capacity. There is not a lot we can do about OPEC in the short term. And the US government has made it difficult for oil companies to build new refineries due to stiff environmental regulations and difficult permitting processes. They have also limited the supply by not allowing drilling on the Outer Continental Shelf and ANWR.

    As for government protecting us and investigating oil companies for manipulating oil prices, this has been done dozens of times by zealous prosecutors. And not a single incident of collusion could be found. Not once.

    And you suggest that government can help refineries maintain efficiency standards. Don't the oil companies already have every incentive to do this without government intervention. They are profit seeking enterprises and efficiency enhances the bottom line.

    And, lastly, how are speculators not speculating with their own money. Well maybe they are leveraging, right? Leveraging can be very risky and very rewarding. People that tend to leverage have extraordinarily high risk thresholds. Sometime they win fantastically and sometimes they crash and burn fantastically. But the creditors are taking the risk. No one can argue convincingly argue that "speculators" manipulate the price of oil. Yes, they usually never take possession. This is true in all futures markets whether it is oil, pork bellies are citrus. But these speculators provide a very useful function by providing liquidity, raising the troughs and smoothing out the peaks.

    Good luck in your new job,

    Grace,

    Steve

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  4. Steve pretty much summed it up. And yeah, "Supply Gouging" is a Harrison Brookie original (patent pending). The only thing I would emphasize is the politicization of price gouging speeches. This is a perfect example of politicians using misinformation to "show" people they are watching out for them.

    If you want to hear more on oil speculators, check out my comments on the radio:
    http://harrisonbrookie.weebly.com/1/post/2008/07/why-oil-speculators-are-good.html

    Oh and Graydon I'm going to have to ask you to get your priorities in order: 1) Bottlenecked 2) wife 3) job

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  5. Steve - Yes, that is exactly what I'm ok with. No food or gas. In fact, I think the best thing would be if the hurricane just wiped out everyone, so then we wouldn't have emergencies or greedy companies. Or politicians or the new 90210 series.

    In all seriousness, if the two-dimensional scenario you've set up is true, then of course I'd rather have greedy business. But how am I to know this isn't a false dichotomy?

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  6. Graydon7:17 PM

    Steve,

    Thanks for the reply. I started to draft a response, but frankly I'm not passionate enough about this issue to spend the amount of time I was spending on the response! So I'll try to shortly sum up my position.

    Basically people are peeved because they are having trouble filling up their cars, and this winter some will have trouble heating their homes. They are mad at the government because the government is supposed to protect us, but they never warned us about this crisis or made a real effort in trying to prevent it (like reducing our dependency, increasing the opportunities for supply). The governement's red tape and restrictions on drilling is main reason for the artificial manipulation of supply. There's tons of oil, but no one's allowed to acess it. They are mad at OPEC, but many people don't know who they are, so they don't know they are mad at them. But as you said OPEC plays such a huge role in the production, and many of the countries in OPEC are our enemies, so they certainly would like to hurt us any way they can, and the price and supply of oil is a good way to do to that.

    Since the government is always pointing fingers, and people just don't know about OPEC, then people are left with the oil companies to blame and get mad at. They are mad at them because the oil companies because they are making billions of dollars, and people are bitter not because they are making billions, but because they are making it off of a commodity that we need and which, now, people can't afford. So it's just easier to blame the oil companies because they are directly affecting their wallet.

    The fact is that like we have become so dependent on oil, and oil is not like a normal commodity, like clothes or electronics, so I don't think it can be thought of with the same mindset. We need to have some sort of control over its price and production or else people will suffer. I know the market will correct for it eventually (people will drive less, demand for more fuel efficient cars, etc), but the fact is people will suffer in the short term, and the government's job is to protect us. So I think they need to do something to protect us. I'm not sure what the economic theory is on that, but trying to prevent pain and suffering is a good thing in my opinion.

    So people want the government to start protecting us, and they would like some sort of compassion from the oil companies regarding our plight, since we are the source of their prosperity. Corporations give to charities all of the time, is it too much to ask (not force, but ask) the oil companies to set up a charity using the BILLIONS of quarterly profits which helps people fill their tanks and homes, and helps reduce the cost of food? If nothing else it would be a good PR move. But the fact is the oil companies don't need or care about good PR, because people need to buy their product no matter what. Which is why I don't think the companies have any incentive to improve upon their operations, which affects supply and price.

    Of course some blame falls on us for not reducing our dependency and for not planning for this type of crisis, and we don't hold our government accountable. But come on!...that's my point...come on!

    So that wasn't as short as I planned, but there ya go. My two cents, which is what it's worth.

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  7. "if the two-dimensional scenario you've set up is true, then of course I'd rather have greedy business"

    Well Justin the data unanimously supports that model. Essentials like gasoline are sold below market prices immediately after because public perceptions of fairness are so strong in natural disasters that price gouging is either illegal or heavily criticized by most consumers. Charging the appropriate price generates extremely adverse moral and reputational consequences for the businesses. This is why we see lines at the gas station and shortages of water after hurricanes. Here are two articles from the well respected Cato Institute that support this:

    http://www.cato.org/pub_display.php?pub_id=5150
    http://www.cato.org/pub_display.php?pub_id=5622

    "Basically people are peeved because they are having trouble filling up their cars"

    Graydon I can totally sympathize. Traci and I are expecting to spend $300 on gas this month, less than we've gotten paid since we moved up here two months ago. But just because things are expensive, doesn't justify government intrusion into the price system. Houses were too expensive so Congress started Freddie and Fannie and look at the results. Apartments were too expensive so NYC instituted rent control with disastrous results. My main point is that the price system works: 1) Hurricane hits 2) Prices go up 3) Businesses respond to the high prices (and high profits) by producing more gas 4) prices go back to normal. If we stop #2, #4 won't happen.

    Also, Graydon you said "government is supposed to protect us" four times. Yes it is appropriate for a government to run the military and to protect property rights. But I don't think you could find a Founding Father to agree to let the government "protect" us from natural high prices. Even if you turn off the thermostat, it's still hot. Even if you artificially lower prices, you still have to pay, just with a line instead of money (or worse, through political favors).

    "But the fact is the oil companies don't need or care about good PR, because people need to buy their product no matter what"

    So why do we see commercials about how much the oil companies care about alternative types of energy. It's because its publicly popular to be so.

    "Which is why I don't think the companies have any incentive to improve upon their operations"

    Again, if you let the price go up, more greedy self interested producers will enter the market (or current ones will increase output).

    "oil is not like a normal commodity"

    As for this and your worries about foreign oil dependency, that's a future post in progress.

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  8. I've heard these arguments so many times, and I'm always struck by the idea that if they're all true, then there is actually no such thing as corporate greed.

    Which keeps me skeptical.

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  9. Another thing that keeps me skeptical is the incredibly large amount of smart people who are blaming deregulation for our current financial crisis: http://tinyurl.com/4dafng

    It seems very likely that not all regulation is bad.

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  10. [...] To my understanding, these statements are half truths. AIG failed because they jumped into a new and very profitable insurance market that they did not fully understand. This could be for one or of two reasons: 1) they mistakenly took a risk and lost, which is the nature and success of capitalism or 2) they knew the government thought they were "too big to fail" so they correctly took the risk knowing the taxpayers would pay for the loss. The second is an instance where I believe corporate greed is not only existent but harmful. But don't misunderstand what I'm saying. If the second is reality, it is not AIG I blame. It is the government financiers who allowed them into the public purse. [...]

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  11. Justin,

    You said:

    I've heard these arguments so many times, and I'm always struck by the idea that if they're all true, then there is actually no such thing as corporate greed.

    What statement suggests that "there is no such thing as corporate greed." For the record, if greed is the goal of maximizing earnings then I believe every company is greedy. Are you talking about the PR statement?

    Steve

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  12. Justin,

    You said:

    I've heard these arguments so many times, and I'm always struck by the idea that if they're all true, then there is actually no such thing as corporate greed.

    What statement suggests that "there is no such thing as corporate greed." For the record, if greed is the goal of maximizing earnings then I believe every company is greedy. Are you talking about the PR statement?

    Steve

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You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.