Crude economics: cutting off oil bysteria

Reason, May, 2006 by Brian Doherty

THE AFTERMATH of Hurricanes Katrina and Rita saw sharply rising oil prices at the pump. These inevitably sparked accusations of gross profiteering on human misery.

But in a recent paper by analysts Robert Bradley and Thomas Tanton, the Institute for Energy Research shows supply and demand adjusting just fine in the aftermath of these disasters. The hurricanes interrupted around 30 percent of America's refining capacity in August and September 2005. The refining industry was already nearly maxed out in late August, working at 97 percent of capacity. By early October, after the storms, that figure was reduced to 70 percent; by the end of the year, it was back to 91 percent. Cries of gouging arose when post-Katrina pump prices increased at a higher rate than did crude prices, but pump prices are also back to pre-Katrina levels.

Oil imports--that villain of the president's State of the Union address--reached record highs in early October to meet demand and keep prices from spiking higher. Higher prices had an effect on demand as well, prompting people to use less gas.

When such disruptions happen, the authors conclude, we have to let prices rise: "Under-pricing at the pump would have sent a bad price signal to consumers (that there was more supply than there really was), producers (that gasoline was less valuable than it really was), and importers (that imports were less needed than they really were)."