Pricing mechanism did its job during California gas shortage – you could get gasoline if you wanted it

The recent gas shortage in California is a superb illustration of the idea that if you don’t meddle with prices and just leave them alone, they will communicate to everyone how scarce a resource is. The natural and expected result is that people who want the resource can get it.

Prices worked

The recent gas crunch shows what happens when you let the market work. Prices spiked because of a supply crunch. People who didn’t really, really need gasoline held off on topping their tank. People who really, really did need gas could get it.

Two things prove this to me.

First is the comments made on television. During the start of the crunch, lots of people were interviewed on the local television channels. A lot of people complained about the price. That’s fine.

Far more insightful for showing the pricing mechanism in action were many comments that people would hold off on getting a full tank. Many people said they were only getting half a tank when they were near empty. Obviously those folks held off a bit until prices would come down. That means the gas that was in the underground tank was available to someone else who really needed it.

Second thing I noticed is the lack of lines. News reports covering all of the Los Angeles highlighted exactly two gas stations that ran out. I’m sure there were more who bought their gas exclusively on the spot market.

I think what happened at the gas station near my home is far more revealing that those two discount stations.

On my morning walk, I usually stop by a Circle K/Mobil station to get a diet soda. I also drive by that station when I get on the freeway.

I never saw a long line at the gas station during the supply crunch.

Why? The pricing mechanism allocated the gasoline.

People were not in a panic to top off their tank. If you didn’t need gas now, you could wait a few days.  The shocking increase in price kept people away unless they really needed gas.

Therefore, gas was available to people who did need it.

Cause of the shortage

Other places describe in more detail what caused the momentary shock.

The very short version is one refinery in northern California had a fire several months ago and was off-line. The immediate trigger was that another refinery in Southern California had some sort of glitch in their electricity supply and went off-line. (A friend who works for Southern California Edison quietly pointed out on Facebook that this particular refinery produces their own electricity. Fair enough comment.)

Two other major factors enter in.

First, federal and state law requires that gasoline sold in California has a very specific formulation in the summer and has a different, very specific formulation in the winter. It is illegal to sell any other formulation. Therefore there is a blend that has to be sold in California and can only be sold here. The refineries were switching over from the summer blend to the winter blend, which complicates storage and distribution.

Different formulas are required in all neighboring states. That means you cannot sell Arizona or Oregon gasoline in California or the other way around. You can’t move gas from there to here to alleviate out shortage. It’s illegal to do so.

Second, it’s my understanding that either federal or state regulators could have issued waivers to allow temporary use gasoline from our neighbors, but they did not do so.

Ignorance on display

One of our elected officials got some air time by demonstrating the typical lack of economic knowledge that we can expect anytime there is distress.  Said politician was on camera demanding an investigation to figure out who caused this crisis.

Of course the crisis to be investigated was the high price, not the temporary shortage, why there’s no excess capacity, how government constraints created the crunch, the legal requirement to sell a state-unique formula through a certain day and a different formula the next day, or that several government agencies chose not to adopt a quick solution of allowing temporary use of gas from a neighboring state.

Prices in my neighborhood

Here’s a graph of the prices at the gas station in my neighborhood. I jotted down the prices at a number of points during the crunch. I didn’t write down the price every day and I don’t know what the prices were at any other station in my area. This does however provide a frame of reference for this situation.  It also allows a reference point for the future of how prices communicate scarcity, which allows people to adjust their purchases.

Update 11-3-12:  The price is down to $3.949 last night and still there this morning.  The lines today are the same length as when gas was at its peak. Basically, there are no lines now and there were no lines then. There were open pumps this morning and when gas was $0.73 higher. That pricing signal provided by supply and demand did its job.

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