Economic Lessons from Hurricane Ike
September 15, 2008
On September 12, the day before Hurricane Ike was scheduled to hit the Texas coast, all over the Southeast, cars lined up at gasoline stations to fill up. Why?
Because drivers were worried about supplies. Why?
Because Ike might flood the refineries along the Texas coast.
Why didn't everyone go to the gas station as soon as Ike cleared Cuba on Thursday? Because some people figure out economic relationships sooner than others. The gift or the skill of entrepreneurship is not evenly distributed. Not everyone sees an opportunity at the same time.
To those stalwart drivers who filled their tanks at $3.50 a gallon, I say: "Good show!"
To late-comers who lined up five minutes after the station changed the price to $4.50, I say: "Better late than never!"
To drivers those who had to sit in line with their engines running for 20 minutes, only to get to the pump after the station had run out of gas, I say: "Sorry, Charlie."
WHY GASOLINE PRICES ROSE
Who drove up gasoline prices? Gas station operators? Or all those folks lining up for gas?
The station operators raised the prices. But why? Here are some choices:
1. Inflation
2. Corporate greed
3. Random behavior
4. Entrepreneurship
The correct answer is #4. "Entrepreneurship?" you may ask. "What entrepreneurship?"
The entrepreneurship of looking at a long line of cars and realizing, "In the next four hours, I can make more money if I raise prices now."
But isn't this corporate greed? If you think so, why didn't the station raise prices the day before? Or five hours before? Or an hour before?
Greed is a constant. Opportunity is not. Neither is perception.
The station owner did not see the opportunity five hours earlier. Why not?
Because cars were not lined up. Why not?
Because the drivers were behind the curve.
Should we blame inflation? No. It was not fiat money that caused the price hike.
What about higher costs of gasoline? Not in Friday. Maybe after the hurricane took out all the refineries. But drivers on Friday could only guess about the refineries.
So, it was not higher costs of production that pushed up prices. It was not the Federal Reserve System pumping out money. Then what?
It was long lines of drivers bidding prices higher. "We'll pay! Just let us get some gas!" It was the auction system.
The free market is a gigantic auction system.
Perception about the future -- flooded refineries -- coupled with money in people's bank accounts, or credit available to them, led to a bidding war. The fundamental principle of the free market is this: High bid wins.
What was true on Friday, September 12, is true all of the time. It is not higher costs that push up prices. It is buyers' bidding against each other.
It was not inflation that pushed up prices on September 12. Prices were higher for gasoline, but budgets will be adjusted to pay for those higher prices at the pump. We don't get something for nothing.
CONCLUSION
So, what have we learned from Ike?
1. Supply matters.
2. Demand matters.
3. Entrepreneurship deals with the future.
4. We do not all see economic cause and effect at the same time.
5. Some prices can rise apart from monetary inflation.
6. Budgets must be adjusted.
6. Perception counts.
7. Costs do not drive up gasoline prices; drivers do.
8. The early bird gets the worm . . . at $3.50 instead of $4.50.
One more thing: gasoline stations made more money, briefly, but Hurricane Ike was not a net economic benefit.
If you ever read that Hurricane Ike will create new jobs in the Gulf coast, think "Keynesianism."