The Gas Price Story of Hurricane Sandy
For those schooled in economics, the gasoline shortage during Hurricane Sandy last November was no surprise. Demand for gas goes up. Supply lines are disrupted. It’s the old supply-and-demand thing. The price goes up. Higher prices attract new supplies from unconventional paths. Prices respond and fall back again. The market handles it just fine.
All is well except for one thing: There were anti-gouging laws on the books. These laws restrict the upward path of prices. Plus, most people anticipated exactly what happened. By executive order, governments at all levels impose even more restrictive controls. These controls prevented prices from being licitly raised at the onset of the crisis.
Most of us got our news during this time from conventional outlets. We lived on scraps of information. Most reporters, as you probably know, are not schooled in economics. They don’t know what to look for. They see a gas line and don’t know what to make of it. The whole problem just mystifies them. They don’t get how cause and effect work in the economic realm. That’s why those of us on the outset had to make due with such scattered reporting.
What about the people on the ground? There was one trader in New Jersey schooled in economics who knew exactly what to look for. He understands cause and effect. He knew that shortages were coming. And he knew the market wouldn’t give a flying flip about the government’s orders not to raise prices.
His name is Peter Earle. He did real-time reporting during the entire episode.
His report begins three days after the storm hit. He was on the ground watching pump prices. He saw black markets working. He was downloading smartphone applications that were quoting real trades. He spent his evening hours on websites where there were bid-ask quotes going on constantly. He subscribed to every gas tweet, of which there were many thousands.
What he found was extremely revealing. Despite laws and warnings, threats and denunciations, the market did, indeed, work as expected. The action began on Nov. 3. Prices shot up from $5 to $10 and $15 per gallon. Diesel was selling for $35. Generators were also all over the markets, rising in price.
The markets became very sophisticated very fast. People were including delivery in their price at premiums. Within hours, the terms became more complex, varying by quantity purchased and service provided. One seller offered the following terms: “10 gallons costs $150, 20 gallons costs $200, 30 gallons costs $250.” Another offered 50 gallons for “no less than $7 per gallon.” Still another offered $12.50, but with a 5-gallon minimum.
Earle calls the sellers of gasoline and other essentials “disasterpreneurs” — business people who know how to make a buck while providing the services people need. We think of black markets as consisting of sketchy people selling to sketchy people, but this was not the case. Absolutely the whole population was involved.
Already on this day, the economically illiterate were denouncing what was going on. Earle quotes one tweet: “Instead of trying to screw people, you should be someone who has no heat… free gas ***hole.”
Well, that misses the point. Gas will be rationed in good times and bad. It can be rationed through market prices that reflect real scarcities or it can be rationed by executive edict, as was eventually the case in New Jersey.
All throughout this day, prices were both up and down. The highest price Earle found was from devastated Staten Island. It was for 5 gallons for $25 per gallon. But not even an hour later, he found a new low offer that fell to $8 per gallon.
Interestingly, not all bids were for money. Earle found some evidence that some unnamable illegal services were being offered for gasoline. Also, the following morning, a trade in New York sought to buy 5,000 gallons of gas for a baseline minimum of a $20 Gold Eagle.
Interesting, isn’t it? Most people don’t keep much cash on hand. In a crisis, they can’t get to a cash machine. In a serious crisis, the cash machines don’t work. Or maybe they are empty. What do you do? Gold and silver might be the only truly marketable commodities.
The trading boards were also filling up with offers to bring gasoline from Maryland, Ohio, and as far away as Georgia — all provided that market prices would prevail. After all, if there are surpluses in those states, why not truck it in, make some money, and do some good at the same time? Makes sense.
Yet as expected, it was just as these markets were driving down the price to a stable equilibrium that officials at all levels started to announce they would soon begin prosecuting price gougers. That did it: Prices went up again to the $15-20 range. This was when things got pretty scary and the market players had to become a bit more careful, arranging deals in secret and exchanging goods rather furtively.
The political pressure to crack down only increased. As I wrote at the time, Gov. Chris Christie briefly considered letting the market work. But reports said that he said this almost as an intellectual musing and then quickly shifted to a full-scale rationing position based on the 1970s model of something totally irrational. The days on which it was legal to buy depended wholly on your license tag. That immediately led to new forms of markets opening up: markets for license plates!
Did any of the controls make any difference at all? According to Earle, they managed only to drive legitimate markets underground. They slowed markets and distorted them, but did not end them. From the point of view of what was actually being bought and sold, they made no difference whatsoever. People from all walks of life threw themselves into the black market to survive.
People never imagine that they will openly defy the powers that be. Americans like to think that they are law-abiding people and that their government has their best interests at heart. But matters change when your refrigerator stops working, your house is freezing, cellphones die, and your car has no fuel to get to the store or the hospital.
Suddenly, regular people in New Jersey and New York found themselves having to make the decision between obeying and surviving. They chose surviving. You probably would too.
Will officials learn anything from this experience? Absolutely not. They will repeat it. The experience of Sandy only ended in tightening the gouging laws. Gov. Christie was widely considered a hero even though his despotic actions spread misery much more widely than it otherwise would have spread.
Here’s Earle’s conclusion, written during the thick of the action: “What’s keeping folks fed, warm, and safe in Queens and Staten Island? Not FEMA, the Red Cross, Obama, or Romney. Anarchy is.”
By anarchy, he means human action. People finding peaceful ways to deal with disaster. Some of those ways included getting generators, buying gas on the free market, and even paying in gold and probably silver, too.
Here is an interview that was my pleasure to conduct with Mr. Peter Earle, the man who is the source of much of the information above. Peter is a trader in New York with an scientist’s eye for detail. In this interview you will learn how people managed to get by when the whole of the state’s infrastructure collapsed, and the government was doing everything possible to restrict access to basics. He shows how people defied the law in order to survive.
Original article posted on Laissez-Faire Today