For all the photos and social media posts that have been documenting long lineups and product shortages during the coronavirus pandemic, it’s interesting to note that none of them have involved gas stations or petroleum products.
Gasoline is remarkably cheap at the moment — and plentiful. That’s in sharp contrast to, for example, toilet paper. If you’re lucky enough to find toilet paper at the moment, you’re likely to be paying more for it than you might have a few weeks or months ago — at least for the time being.
While the low gasoline prices are most welcome and the toilet paper situation is most frustrating, both are byproducts of the same market forces: supply and demand.
Obviously, we’re seeing unusual market conditions on both sides of the equation. The combination of abundant supply and low demand have combined to significantly drive down the price of a litre of gasoline. Conversely, though, we’ve seen some irrational demand for products like toilet paper which has led to some short term supply shortages.
Low oil prices will mean other economic consequences, but the price of gasoline is not exactly an immediate concern for consumers — quite the opposite. But there’s obviously concern about how panic buying and hoarding of other products could lead to shortages and empty store shelves.
Supply and demand are out of whack and the solution to this problem is to address both: we need more supply and we need to temper irrational demand. There are steps that can be taken, such as messaging from public officials about why hoarding and stockpiling is unnecessary and steps by retailers to limit purchases of certain products.
But the market has its own built-in solution to this problem, although it’s not one that consumers are going to take kindly to: higher prices. But here’s why high prices can actually be helpful in this situation.
If there is a sudden and irrational spike in demand for a certain product, a corresponding rise in prices can discourage people from buying more than they need. A $10 pack of toilet paper is much more preferable to a $20 pack of toilet paper, but a $20 pack of toilet paper is better than seeing a “sold out” sign. People are less likely to hoard when the price is higher, making it more likely that people can get what they need.
Furthermore, when supply and demand cause higher prices, it’s a powerful signal to the market that more supply is needed. More supply will bring the prices back down, and ultimately more supply is what’s needed to calm these fears people have about certain products not being available.
A 2015 study on price surges by economist Steven Suranovic reached this same conclusion and noted that “the market does a remarkably effective job of allocating the scarce goods fairly and helping to eliminate the shortage more quickly.”
We should be careful about interfering too much right now with such market forces. Were we in a situation that precluded more supply from being produced or from being shipped to retailers, then that might require a more drastic government intervention. We’re not at that point yet.
All indication at this point is that our supply chains remain largely in place and that should allow us to ensure that people’s needs are met. If we’re seeing price spikes for certain products in certain parts of the country, that can be useful in knowing what most needs to go where.
In the meantime, we’re likely to see consumer outrage about perceived “gouging” on certain products. We’re likely to see certain retailers shamed over what people might think are outrageous prices on certain goods.
If you’re unhappy with the price at one retailer, go to another retailer. If that’s not an option, then it’s the shortage of the product that’s the problem, not the retailer.
We can all do our part and think long and hard about what we need and what the impact might be of us buying more than we need. Governments can do their part in watching closely and making sure that product is able to get to stores as quickly and smoothly as possible.
However, we can’t ignore the market forces that have a role to play here, too.