Hurricane Sandy and Gas Lines: Regulations Lead to More Problems

In the wake of Hurricane Sandy, government officials in New Jersey and New York interfered with the energy sector and made a bad situation much worse. By threatening to crack down on “price gouging,” the authorities crippled the ability of the market to respond to the emergency shortage of gasoline. Now, faced with the disastrous consequences of their initial policy, the authorities are upping the ante by cracking down all the harder. The whole sordid episode is a textbook example of the problems of government regulations on the energy sector.

Elsewhere I have explained in comprehensive detail why price controls are hurting the residents of New Jersey and New York. In a nutshell: When the hurricane struck, the supply of gasoline was severely curtailed. Because bridges and ports were damaged, it was hard to cart in additional supplies, and even much of the gasoline physically in the region couldn’t be accessed, because the power was out at many of the gas stations.

At the same time, the demand for gasoline went up. This was because of the natural human desire to hoard in the wake of the storm, but also because the subways and trains were knocked out. (This meant more people had to drive to work than before the storm hit.) Put the two together: The supply went down, while the demand went up. Thus, the market-clearing price should have risen significantly.

Alas, the wise authorities in New Jersey and New York didn’t want to let market prices do their job. They warned retailers not to “price gouge.” The consequence was predictable—and I’m not bluffing when I say that, because I literally in my economics textbook (Chapter 17) talked about shortages resulting from price controls after a hurricane—that people would have to line up at the pump. This underscores the basic economics point that it’s not Hurricane Sandy per se causing gas lines. No, it was the government response with price controls causing the lines.

As with most government regulations, once the authorities decided to prevent market prices from rationing the available supply among the motorists who wanted to buy it, they needed to deal with the undesirable consequences. For example, both in New Jersey and then New York City, the government instituted license plate restrictions, where only half of the motorists on a given day are eligible to buy gas. This just added insult to injury; imagine all of the thousands of people who may have needed to get gas on a Wednesday (for example) but now were legally forbidden from doing so.

To magnify the absurdity even more, now the New York State Attorney General is investigating individuals posting ads on Craigslist offering to sell gasoline at “unconscionable” prices. Thus, the very people who are alleviating the shortage—by driving to outer regions and bringing in new gas, or by giving up some of the gasoline that they may have stockpiled before the storm hit—are being punished by the authorities.

The lessons from this episode should be clear. Government intervention in the energy sector achieves the exact opposite of its intended effect. Thinking they were helping with the gasoline shortage, government officials actually exacerbated the problem. Then, seeing the long lines that their own policies had created, the officials introduced yet more arbitrary rules (the license plate rationing). And a final lesson: Fans of the free-market must not blame everything on “liberal Democrats.” In this case, it was the allegedly conservative New Jersey Governor Chris Christie, as well as the allegedly pro-business Mayor Bloomberg, leading the charge against the free market.