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Are You A Victim Of Price Gouging?

By Robert Rapier on September 12, 2017

As a consumer, you undoubtedly get upset when you see gas stations raising prices in the wake of a natural disaster. You aren’t alone. As Hurricane Irma bore down on Florida, residents there lodged more than 8,000 price-gouging complaints with Florida Attorney General Pam Bondi’s office. 

But just what is price gouging? It may not be as straightforward as it seems. The issues of gouging, hoarding, and shortages are all interrelated, and they demonstrate why price gouging isn’t always as simple it seems.

Let’s consider the perspective of a gas station owner, using the recent example of Hurricane Harvey in Texas (because I am more familiar with the logistical issues involved in that one). 

Deliveries to service stations were delayed as a result of a significant number of refineries that were idled due to the storm. That means many service stations saw their gasoline inventories depleting at a faster-than-normal pace. 

In that case, they have three choices. One, they can do nothing and just hope they don’t run out of fuel. Two, they can raise prices to restrain demand, which can also provide an incentive for more supplies to flow into the region. Or three, they can ration gasoline.

There are disadvantages of each approach.

In most cases, a station will opt to raise prices. This, effectively, is rationing by price. It provides a disincentive against hoarding while stretching gasoline supplies for those with the greatest needs. 

The downside of raising prices is that people get angry as they find themselves paying more for gasoline. Many will conclude gouging. But keep in mind that the alternatives are that the station may have no gasoline to sell unless they raise prices, or they will limit how much consumers can buy.

Following Hurricane Harvey, many stations that didn’t initially raise prices either ran out of gas or were eventually forced to raise prices as other stations ran out and their demand went up. Stations that opt to ration must often contend with long lines of customers who are only getting a partial fill.

If a service station raises prices because they (or their supplier) are legitimately concerned about running out of fuel before they are resupplied, I would not consider it price gouging.

On the other hand, if a service station has no real worries about its gasoline supplies and is only raising prices to take advantage of the situation, then I would consider that price gouging.

So don’t presume that a gas station is gouging just because it raises prices during a disaster. It’s fine to register a complaint, but often these complaints are resolved in favor of the supplier when they show that the price increase was justified because demand began to outstrip supplies.

Without a doubt, this does cost money for consumers. At the same time, some refiners and fuel marketers are making money from this situation. 

Which ones? That will be entirely situation dependent. In the case of Hurricane Harvey, even suppliers who raised prices ran out of fuel in many cases. The increase in gasoline prices was unlikely to be compensated by the ultimate loss of sales.

The real beneficiaries of that situation were those refiners whose refineries were unaffected by the hurricane, yet who could still supply fuel into the regions with spiking prices.

Note: Let me be clear that this article isn’t a “defense” of price gouging, but rather an explanation of why raising prices in a disaster isn’t always price gouging. I am only trying to provide more background for you as a consumer about what is often going on behind the scenes in these situations.

 


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