A Policy Wreck: Gas Rationing Amid Plenty of Fuel

If you need gasoline in storm-struck New York City, Long Island or most of New Jersey, your chances of buying some today are no better than 50-50. But don’t blame Sandy for your ongoing inconvenience; misguided politicians are doing most of the damage now.

New York City and Long Island imposed gasoline rationing last week for the first time since the supply disruptions of the 1970s. Under the system, which is similar to one that was instituted a week earlier in New Jersey, vehicles with license plates ending in an odd number can get gas on odd numbered days, and motorists with even-numbered plates can fill up on even days like today.

But unlike the 1970s, when Middle East turmoil prevented crude oil from reaching U.S. refineries, there is no gasoline shortage – not nationally, and not even in the Northeast. If you drive two hours to the north, south, or west of Manhattan, you can get all the gas you want without waiting in line at all. The federal government reported that, nationally, the inventory of gasoline available at service stations and supply depots increased by 2.9 million gallons last week from the previous week

So why do New York and New Jersey face a crisis bad enough to require rationing? Because rather than let forces of supply and demand stretch existing supplies while opening new routes to bring fuel to the metropolitan area, local authorities threaten distributors and dealers with legal action for “price gouging” if they raise prices to reflect the costs, effort and business risk (such as being stuck with unsold higher-cost fuel when prices go back down) of going the extra mile for their customers.

Immediately after Hurricane Sandy, many gas stations had no power with which to pump gas at all. That problem has been largely resolved (except for parts of Long Island that have been slow to get their power back), so stations in most areas  are ready to sell whatever gas they can get. The main problem now is that local refineries and gasoline terminals in New York Harbor are still not operating at normal capacity. Last week’s snowstorm only delayed recovery at those facilities.

With gasoline in limited and uncertain supply, but continuing to sell at ordinary prices, people raced to stations as soon as the power came back, to fill up while they could. Entreaties not to hoard fuel were, of course, ignored. If you wait on line for four hours to pump gas, can you be expected to buy just a few gallons?

There is no reason for this artificial scarcity to persist. The region’s roads, bridges and tunnels, except the devastated Brooklyn-Battery tunnel, are open. Trucks that would ordinarily carry fuel from local sources to local dealers could be rerouted to more distant terminals where gas is readily available. Fuel delivery drivers would probably welcome the chance to help their neighbors, and the overtime pay wouldn’t be a bad thing either. But for this to happen, New Yorkers and New Jerseyans would have to pay higher prices.

That would be a good thing, because a price hike would end the shortage almost immediately. Not only would it cover the cost of bringing more gas to the stricken region, it would prevent hoarding more effectively than politicians’ nagging could ever hope to do. If gas were $6 or $8 per gallon, nobody would hoard it. People would buy exactly what they need and no more, which would stretch the limited supply and, in turn, effectively cap how far prices could rise. The higher prices would attract more supply into the region, stretching the supply even further, also capping prices. Eventually, the local infrastructure would be repaired, prices would fall, and it would be back to business as usual.

But when governors, mayors, and especially headline- and litigation-happy attorneys general like New York’s Eric Schneiderman and New Jersey’s Jeffrey Chiesa, are all eager to go after people for raising gas prices, suppliers won’t stick their necks out. Instead, gas stations sell the little supply they can get through their regular supply chain; when that’s gone, they close up shop.

Chiesa wasted no time demonstrating the risks of making rational business decisions in this politically charged post-storm climate. Last week he sued eight Garden State businesses for the offense of selling their products to willing buyers at mutually agreed prices. Seven of his targets were gas stations; the eighth was a Holiday Inn Express motel in the New York City suburb of Parsippany, which, the AG’s press release breathlessly reported, had the temerity to raise its top nightly room rate “32 percent” from $90 to $119 after Sandy struck.

Chiesa and his staff may not get around enough to know that hotels constantly change their rates, or that $119 a night is hardly a rate that shocks the conscience in metropolitan New York. They also might not have considered the extra costs that hotel operators surely incurred after Sandy to keep staff working on overtime and backup generators running or ready, so guests could enjoy clean rooms, hot water and maybe even an on-demand movie. One of the allegedly offending gas stations posted a price of $5.50 for its product, which is at the bottom end of the range that strikes me as logical in the circumstances.

Why would $6-a-gallon gas be better than rationing, which appears to be working well in New Jersey? Because appearing to work well and working well are not the same thing. Rationing doesn’t address the problem of fuel scarcity; it just hides the problem by forcing half of those customers who would wait in line stay home, thus halving the line.

A system that actually worked well would ensure that you could buy the gas you need when you need it. Rationing certainly isn’t working well for those unlucky motorists passing through the area on the wrong day, for example. While driving from Boston to Washington, D.C., an unwitting traveler now faces a 50-50 chance of being forced to buy a small jug and fill his tank by tiny increments – or, alternately, he faces being marooned in New Jersey for 24 hours. That scenario fits no one’s definition of a system “working well.”

Hurricane Katrina did massive damage to the Gulf region’s fuel infrastructure, but gas was generally plentiful in the storm’s aftermath, if expensive for the time. (The $3.20 I paid for gas just after the 2005 storm, which then struck politicians as outrageous, sounds like a bargain in many parts of the country today.) It wasn’t until political figures threatened to prosecute those charging higher prices that there were gas shortages in Houston as the city’s residents tried to evacuate ahead of Hurricane Rita, not long after Katrina struck.

Politicians would do better to declare that they recognize the current situation’s abnormal character, and that they understand higher prices are necessary to bring the region the fuel that the residents of New York and New Jersey need. Instead of hunting for someone to vilify, leaders should reassure the public that the higher prices are temporary, and that if everyone buys only what they need, we will all get back to normal as quickly as possible.

About Larry M. Elkin 551 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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1 Comment on A Policy Wreck: Gas Rationing Amid Plenty of Fuel

  1. Politicians using a crisis to score political points! As the inspector said to Bogart, “I’m shocked, shocked.”

    Long Island is sui generis in terms of gasoline supplies. “Raw” gasoline comes into Port Jefferson daily to be blended with additives to enhance octane levels and add detergents. The blending facilities were damaged by the twin storms. The output of blended gas has substantially decreased. Exact numbers are not available because, if real numbers were available, panic buying would have accelerated. This is why Gov. Cuomo did not impose odd-even days as Gov. Christy did: the pubic might have hoarded even more gas. At gas stations here in Manhasset, many customers wait to “top-off” their tanks by adding a gallon or two.

    At the moment free-market principles will not do much good. Rationing only keeps the lines shorter and perhaps reduces panic buying and hoarding but it does not affect supply. Eight out of 10 gas stations with power on the North Shore do not have gas due to lack of supply. Prior to Sandy, most gas stations got deliveries once a day. Now stations are lucky to see a tanker every three days. This is the real rationing which is happening behind a wall of misinformation. The operators of the blending facilities are doing the rationing.

    Wind and water are the primary culprits for the lack of supply. Several storage areas (tank farms) for blended gas were underwater following Sandy. Salt and fresh water may have tainted some of the stored gasoline. Newsday, since it has no staff, has not bothered to send a reporter to Port Jefferson to investigate why tank trucks are not moving. While not quite Dresden, a good AP reporter (like you were) would have noted that the Port Jefferson blending facilities were badly damaged. No matter what the price, if Port Jefferson is down and out, Long Island will not have gas.

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