TCS Daily


Panic at the Pumps - Terrorism's Price Spike

By Duane D. Freese - September 19, 2001 12:00 AM

In the immediate aftermath of the bombing of the World Trade Center in New York City, gasoline prices at one Oklahoma gas station suddenly jumped to $5 a gallon. A few others elsewhere did the same.

There was no economic reason for it. As Secretary of Energy Spencer Abraham made clear, the nation faced no energy disruptions. And attorneys general from around the country promised swift investigations for price gouging.

What happened instead was likely a lot less sinister. It was simply a moment of panic. Gasoline prices you pay reflect the price the service station owner expects he'll have to pay for the next gallon he has to buy. The red-faced Oklahoma gasoline station owner, for example, said that a supplier told him that it might touch $4 a gallon if there was a supply disruption. Throw in taxes and profit margin and, suddenly, $5 a gallon. The station quickly began apologetically offering rebates to those customers who bought the gasoline for that outrageous price.

But the question isn't why gas station owners might try to get the highest price they could for gasoline - and risk the wrath of customers as a result -- but why would drivers in Oklahoma and elsewhere pay that price? The average price around the state was about $1.55 a gallon. And why would drivers in other places where prices jumped to $2 or more a gallon drive in and fill up at such a high price?

Panic is no doubt the answer there, too. But was the panic without reason?

Hardly. The fact is that even as gasoline prices have fallen in recent months from their highs in late spring, the underlying energy security picture for the United States has improved hardly at all in that time. The good news has been that American refineries stayed up and running, while the Organization of Petroleum Exporting Countries maintained enough supply to settle the price of crude at $24 a barrel - down about 25% from its top.

The nation's refineries continue to run at higher than 95% of capacity - compared with 82% for the rest of the industrial economy. Thus, when a Citgo refinery in Illinois suffered a fire a few weeks ago, regional gasoline prices spiked 31 cents a gallon in two weeks. And when Eastern refineries switch production to fuel oil, as they did in early September, prices there go up a dime a gallon.

So, what might consumers expect in the wake of the worst terrorist incident in history? Certainly, not that gasoline prices would go down. People have become conditioned by our dependence on foreign sources for half of our energy needs that any problems can lead to dramatic price increases. And in light of speculation in the media earlier this year about $3 a gallon gasoline, $5 a gallon gasoline hardly appears out of line.

What is really deluded isn't the attitude of the few panicky consumers but the notion spread by media experts, such as those at ABCNews.com, who in late August asked: "Remember the Energy Crisis?" They opined that with energy prices in California going down, and gasoline supplies being fairlyabundant, the Senate might not follow the House lead in enacting the Bush-backed energy bill, Securing America's Energy Future Act of 2001. That bill would open up open up a minuscule portion of the immense Arctic National Wildlife Refuge to oil drilling, encourage environmentally sound development of energy on other federal land and off shore and technological improvements to conserve energy. As such it, would amount to the first substantial energy legislation in a decade.

No doubt, the nation wasn't in the grips of a real energy crisis when Bush began pursuing legislation. It was suffering mostly from some foolish pricing regulations that created a short-term imbalance in supplies and prices. But nonetheless, the fact is that the nation does face a long-term problem of dangerous dependence on suppliers who face pressure from the same forces responsible for the attack on the United States this week.

While Afghanistan, which has harbored the likely culprit in Tuesday's heinous assault on America - Osama bin Laden, is not a source of oil, Bin Laden's fanaticism sparks movements throughout a less than stable Middle East region. If we are to go to war against him and those harboring him, as we must, the nation must expect that at some time others in the region will seek to enact retribution, perhaps by attacking our oil suppliers in that part of the world.

It's true that there is not much we can do to increase domestic supplies and reduce our economic dependence on imports immediately. And it is true that such things as development of the ANWR won't eliminate our need for imports. But as Bush noted, the ANWR reserves could produce as much as Saddam Hussein's Iraq now does. And coupled with other energy development and conservation measures, its development certainly would make us securer in terms of our energy supplies than we are now.

As John Lichtblau of the Petroleum Industry Research Foundation in New York observed about gasoline and oil prices in late August: "There will likely be no dramatic increase, no price explosion, unless something unusual happens."

The problem is, as last week's terrorist act demonstrates once again, something unusual is always happening. If it isn't Iraq invading Kuwait, it is a Middle East war, or a terrorist attack here.

And while we ought never to panic in the face of terrorism, it certainly would help calm American's fears if the Senate would act with some sense of urgency in enacting a real energy policy - before drivers see $5 a gallon gasoline that sticks. 
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