Panic and Gas Prices

In breaking news from the state of Kentucky, governor Steve Beshear declared a state of emergency in order to prevent ‘price gouging’ at gas stations statewide. Gov. Beshear declared the state of emergency to preempt any spike in gas prices as Hurricane Ike approaches Texas. Now, of course, while we all hope that Ike is all bark and no bite, the folks along the Texas coast face a very real threat. Everyone will agree that if Ike does significant damage to the coastline and seriously threatens human lives, the rest of the country needs to do everything they can to prevent the loss of life and property.

Why, then, does Gov. Beshear think it is a good idea to protect the citizens of Kentucky from a spike in gas prices (defined as anything more than a 10% increase in prices during a state of emergency or national threat)? During cases of national crisis, it is of the utmost importance that markets are allowed to run their course without interference. People sometimes fail to understand this point, so let’s elaborate.

Very simply, the folks in Texas that are affected by Ike will need as many resources as possible in their efforts to minimize the damage and losses of life. Thus, they will demand more fuel, making fuel more scarce nationwide. If fuel is more scarce, then prices will rise. When the prices rise, the people most likely to buy fuel will be those who need it the most, which, in this case, are the people along the Texas coastline. The people in non-emergency areas will buy less gas as the prices spike, which will result in an immediate diversion of resources (gasoline) to the people willing to buy it (Texans). As the supply of gas in Texas goes up, the prices will lower.

If disaster strikes in Texas, and let’s hope it doesn’t, it would be a mistake to keep gas prices artificially low in Kentucky because then the gas won’t get where it is needed. If the citizens of Kentucky realized that saving $10 at the pump would make a disaster in Texas significantly more devestating, no Kentuckyian would support this measure. So, I ask again, why is Gov. Beshear declaring a state of emergency? All this move does is save Kentuckyians a few dollars but it puts the lives of those affected at a much greater risk.