My friend Rob Bradley, President of the Institute for Energy Research and one of the world’s leading experts on oil and gas markets, just posted the note below on a listserve that i participate in. He has agreed to let me post it here.

“Post-Katrina, there has been purposeful underpricing by some major refiners in an attempt to avoid political prosecution. This has resulted in out-of-gas situations at some gasoline stations. This problem is likely to become much worse post-Rita. Gas prices will need to go a good deal higher to the extent that refining capacity is interrupted, yet there is a good chance that prices will not go high enough, given the circumstances. Closed service stations will tell the tale, and even with such underpricing there will still be charges of “price gouging” and “unconscionable pricing.”

The clarion call to oil companies and politicians from economists, consumer advocates, and environmental groups (the last who believe that oil prices are below “social costs”) should be “price to clear the market,” not “hold the line on prices.”

Consumers do not really save money when gas is not conveniently available and time is wasted in gas lines. There is mental strain just knowing that gas may not be available to support routine activities or for that emergency moment.

We have a strong intellectual case for full pricing. Here are some points that come to my mind–please keep this discussion going if there are other arguments or situational evidence that you run across. This is likely to be a big issue for some time, and expect congressional hearings and calls for price controls, allocation controls, and windfall profits tax.

Market-clearing pricing:

1) discourages tank topping, thus creating more effective supply;

2) empowers consumers with optionality–the ability, the choice, of buying gasoline;

3) reduces gasoline lines, which waste fuel, waste time, and create unnecessary emissions (it is ozone season during hurricane season);

4) encourages full conservation, where consumers see the real scarcity price and act accordingly (carpooling, etc.)

5) provides full incentive to refiners and other industry parties to eke out more supply in the short term and, longer term, increase nameplate capacity.

“Buffer of Civility”
It oil pricing becomes politicized and physical shortages/gas lines result, we are back to the summer of 1979. There will be civil disobedience in the gas lines, and it will bring out the worst in all of us. I would like to share a quotation from a Wall Street Journal opinion-age editorial of June 26, 1979, published in the wake of a fuel riot in Levittown, Pennsylvania. (Scattered gunfire, arson, vandalism, etc. were happening elsewhere in the shortage environment.)

Simply entitled “Buffer of Civility,” the op-ed read in part:

“Classical economists used to list among the virtues of the price mechanism that it avoided social strife. It did not set group against group, they taught. In our lifetime ? we have generally allowed prices to allocate goods among different end uses. It worked so smoothly we did not understand what the classical economists meant; today, we see. In addition to its economic virtues, the price mechanism is a vital buffer of civility.”

It will be not only economically efficient but also civil to allow prices to work their magic in bad times, as in good. I hope we can get this message out in every way we can in the challenging weeks and even months ahead.”

– Rob Bradley

Robert L. Bradley Jr.
President, Institute for Energy Research
(Senior Research Fellow, Center for Energy
Economics, University of Texas at Austin)