$10 per Gallon Gas and Shortages? Nope.

An oil industry analyst (at Goldman Sachs, if I remember correctly) recently argued that within the next 10 years we could see $10 gasoline and shortages at the pump.  I am not convinced to say the least.  What I would say is this: the two are mutually exclusive.

Is it possible that we could see $10 gas in the next 10 years?  Sure.  Any number of unpredictable events could happen.  WMDs unleashed in the middle east.  Massively destructive natural disasters.  Choose your poison.  But if it happens, we won't see shortages at the pump as long as the free market is allowed to work.  Why?  Because the market ALWAYS finds a point of equilibrium between supply and demand.  The price fluctuates until the right number of buyers and the right number of sellers agree on the right price. 

In the case of gas if there really was a supply pinch, the price would keep rising until the number of people willing to buy was reduced to a number that the supply could support.  That, my friends, is not a shortage at the pump because, while expensive, the people who really need it can get it.  A shortage means no gas for anyone.

So, what would cause a shortage at the pump?  Politicians trying to "help" us, of course.  Rather than looking forward a few years, it would be easiest to understand it in terms of the present.  Say Congress passes and the president signs a law this week rolling back gas prices by $1.00 and overnight the average price drops from about $4.00 to about $3.00.

What would happen next?  First, refineries would slash production.  Next, there would be a spike in demand for gas because consumers go on a discounted shopping spree.  This would cause existing supplies to be used up even faster.  Then, because refineries have slashed production, gas retailers wont be able to find gas to buy at any price, even if they were willing to sell it for a loss at the artificially lower rate causing shortages at the pump.  The last step is the development of a black market because of the high value for illegal, off book gas.

How do I know this?  Because this is always what happens when price controls are imposed.  It is entirely predictable.  Ultimately, what's my point?  Keep the politicians out of it.  Let the free market do its job.

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