Hurricane Harvey made landfall in Texas last Wednesday, dumping more than forty inches of rain on much of Southern Texas. Our hearts go out to those affected by the disaster and recommend donating to the Houston Food bank. In the aftermath of Harvey, we have seen great displays of courage and compassion as the humanitarian response has been overwhelmingly positive. One story that caught my eye, on the other hand, was news of a store mistakenly selling a case of water for $42. Understandably, the social media response was extremely negative, the company apologized and the pricing was reversed. It was clearly a breach of customer trust: how come the oil industry gets away with it easier?
Burning that Gasoline
Houston is an integral hub of the modern oil production and distribution network. Many refineries are located in the Houston area and oil distribution to much of the Atlantic coast has been interrupted. With this major hiccup in its production, gasoline prices have understandably increased around the US.
Gas prices nationwide have increased ~15% since Hurricane Harvey. Daily gasoline consumption is around 400MM barrels a day, this past week has cost American consumers an extra billion dollars. Considering this is a major portion of many Americans' budgets, this is a nationwide paycut while we wait for the production to increase back to normal levels.
Why Isn't Increasing Gas Prices 'Price Gouging'?
The rules of supply and demand allow the price of a good to always settle where both the producer and consumer find the cost worthwhile. The producer always wants a higher price, the consumer always wants a lower price. When a price is artificially capped, however, then shortages generally arise. Tenants with rent control generally have worse maintenance. In 2015, Maker's Mark whiskey ran into a shortage because they refused to raise price for some reason. Price is just a natural way to counteract either an over- or under-supply.
I find it very interesting why there is not an ethical outrage at the gasoline price increases but there is over the pack of water (or for life-saving medicine). Food, shelter and medicine are mandatory for survival but gasoline is pretty close for many Americans as well. Perhaps it is just the intent: there is nothing that happened besides disaster to increase the price of water. There is something that happened besides disaster to increase the price of gasoline: the shutdown of a few refineries and the hiccup in the distribution network. Perhaps the distinction is grey but one thing for certain is that oil companies would take any excuse to raise prices if they could.