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By Robert Rapier on Sep 24, 2008 with no responses

Rationing by Running Out

This looks ominous:


Gasoline Inventories at Lowest Levels Since 1967. Source: This Week in Petroleum

Of course we used a lot less gasoline in 1967, so on a ‘days of supply’ basis, this is probably the lowest level ever.

I just got back to Dallas from the ASPO conference, and we are having shortages here as well. My cab driver said he had been to several stations that had no gas, and my wife told me that the Texaco near our house is out of premium.

Someone asked during a panel discussion at ASPO whether we were going to have rationing by price. I answered that we are having that now. But prices aren’t going up nearly as much as you would expect during these sorts of severe shortages. Why? I think it’s a fear that dealers have of being prosecuted for gouging. So, they keep prices where they are, and they simply run out of fuel when the deliveries don’t arrive on time. If they were allowed to raise prices sharply, people would cut back on their driving and supplies would be stretched further. This article explains it nicely, and is well-worth a read:

Instead of raising prices, in an attempt to reduce demand for gasoline, thereby allocating gasoline that was in short supply by means of price, station managers simply let people fill up their tanks until the pumps were empty. Anyone who wanted gasoline after that was out of luck.

This is rationing by lining up. It is the alternative to rationing by price. Rationing by lining up creates no financial incentive for suppliers of the item in short supply to allocate new supplies to the region of the country which is experiencing a shortage. Instead, delivery schedules remain the same as they did prior to the shortage. This continues the shortage.

Whenever there are complaints about price gouging during a period of a shortage, sellers get the message. The next time there is a shortage, they hesitate to raise prices. They shift to the other allocation system: first come, first served. This subsidizes people who have a low value on their time. People who place a high value on their time prefer to pay extra money in order to attain their goals. But this is made illegal by the state. So, the shortage lasts longer than it would otherwise have lasted.

The official goal of the government is to make certain that everyone has access to the item in short supply. The government says that raising prices during a shortage is unfair. So, the result is the opposite of what the government’s official justification was for holding prices down. There is an even greater shortage, because people buy more of the item than they need immediately. They have no incentive to reduce their consumption, thereby making available applies to those who were at the end of the line. There is no incentive for anyone at the front of the line to refrain from filling his gasoline tank. So, gasoline runs out before the line runs out.

Such are the unintended consequences of government intervention. Personally, I would rather at least have the option of paying twice as much for gas than to either wait in line for a long period of time, or have to drive all over town to find some.

I also said last night that I don’t believe we are entering an era of gasoline shortages. I predict that inventories a month from now are higher than they are today. But the recovery will take longer than if prices had risen sharply.

What is the status of the refineries that are down? This story has the details:

EXXON MOBIL

• Baytown refinery, the largest in the U.S., is restarting.

• Beaumont refinery remains offline.

VALERO

• Houston and Texas City refineries should be back to normal in several days.

• Port Arthur refinery remains shut in but should begin the restart process in several days.

SHELL

• Deer Park refinery, third- largest in the Houston- Galveston area, is restarting. Normal operating rates are expected by the weekend.

• The Shell-Motiva joint venture refinery in Port Arthur is still shut in. Power has been restored, and production of gasoline is expected to begin this week.

BP

• Texas City refinery, second- largest in the Houston- Galveston region, has not restarted.

SOURCES: Department of Energy, the companies

I don’t believe any of ConocoPhillips’ refineries are still down, so their branded stations are likely to have supplies. In fact, CNN reports:

A ConocoPhillips (COP) spokesman said the company “is not short crude and our system is generally balanced.”

Finally, I have just returned home after 3 weeks on the road. I have a massive backlog of e-mails to wade through, and if you have sent me an e-mail and I haven’t answered it, please be patient for a couple of days. I am going to limit my time on the computer for a few days.