Gas Prices ... Markets Work

Katrina's devestation has created the very real possibility for $3-$5 per gallon gasoline prices.   When this happens there will most certainly be an uproar.  The phrase "price gouging" will be on everyone's lips. 

So, dear reader and good citizen, it is imperative that you speak up when you hear it.  The market is at work, allocating scarce resources to their highest valued uses.  There is no better, fairer, or more efficient solution.

High prices will be a vital signal to all of us that gasoline is getting scarce -- so you'd better really need it, or else you should conserve.  No one -- not the President, not your Senator, nor anyone else --  can wave a wand and "poof" problem solved.  Gasoline is going to be tough to come by for a while. 

It's not "gouging" when prices are freely set by voluntarily contracting parties.  Absent collusion and other illegal acts, a price simply reflects the current state of supply and demand.  In times of abundence, suppliers compete with suppliers to offer product to consumers, driving prices lower.  In times of shortage, consumers compete with other consumers to buy from suppliers, driving prices higher in the process.  The resulting price, increasing or decreasing, is just a messenger -- shooting it doesn't get rid of the problem of scarcity any more than plunging a thermometer into an ice bucket makes a hot summer day cooler. 

But shooting the messenger definitely kills any connection to reality, which removes the essential knowledge and incentives for correct behavior.  Without prices and the mechanism of profits and losses, we lose the ability to efficiently coordinate solutions to complex problems.  People don't conserve, they don't get inspired to find alternatives and substitutes, they don't invest in fuels research or ways to improve the productivity of refining processes.  In short, disaster ensues. 

So speak up and present the sane perspective.  If players (suppliers or consumers) are behaving illegally, then fine - they deserve whatever they have coming.  But in times like this it is highly unlikely that this is the primary source of high prices...  Ockham's Razor says it's much more likely that the source of the trouble is scarcity.