When a natural disaster hits, it’s expected that the surrounding region will have difficulties. What’s less expected, though, is that the price of fuel goes up everywhere. Even though it happens every time there is a disaster, it’s still hard to understand the logic behind the price hikes. Below are three of the reasons why the price of fuel tends to go up everywhere when a natural disaster strikes.
When a disaster strikes, roads are blocked, electric lines get knocked down, emergency services are pushed to the limit, bottled water is in short supply. Even the internet might be gone for days. When this happens, it becomes much harder for fuel companies to ship their products from point A to point B. Whether the issue is one of inaccessible logistics software or impassable roads, they simply are not able to get the fuel where it is meant to go. This in turn drastically reduces the supply of fuel in other areas, which tends to force temporary price increases so that the providers can keep their doors open while they wait for new shipments.
Affecting the Infrastructure
Disasters don’t just impact the people in the disaster area. In many cases, they impact individuals every step along the way. Smaller fuel suppliers often have it worse, put in a position in which they must raise prices temporarily because they are no longer able to get their usual shipments in on time. While larger providers tend to have more options when it comes to infrastructure damage, smaller links in the chain often find themselves dealing with shortfalls that lead to basic supply and demand price increases.
In addition to the distribution issues there are manufacturing issues. The Gulf is responsible for approximately 30% of US oil production and distribution. Extended outages could cause gas prices to skyrocket thus increasing costs (both production and to consumers) throughout the country. Several of the refineries were forced to shut down in anticipation of hurricane Harvey. This means that there could be 30% less gasoline entering into the pipeline. As we know when supply goes down and demand stays the same prices have to go up. So shutting down refineries in the Gulf can have a major impact throughout the country.
People often think that one reason that natural disasters affect fuel prices has nothing to do with the disaster itself and everything to do with greed. They think that when a disaster hits, people expect the price of fuel to go up. So since people expect it suppliers will raise their prices to take advantage of this expectation. Merchants tend to sell their goods as the price point at which the consumer is willing to buy, and many legislators think that they are helping the situation by outlawing “Price Gouging” which is the practice of raising prices by multiples of their “normal price” during a disaster. But as the following video from Economics Professor Bryan Buckley shows raising prices actually creates economic incentives for supplies to get more of scarce resources to the emergency site than would be created if prices are held low.
Economic incentives will encourage entrepreneurial to load up trucks with supplies if they think they can make a big profit by doing so. Of course some companies and individuals will be charitable for either altruistic reasons or because it is good for public relations. During Hurricane Harvey there were stories of companies like “Mattress Mack” allowing refugees from the storm to sleep in their showroom, Bass Pro Shops donated boats, larger companies like Walmart, Dell and Dow Chemical donating millions, while smaller companies like bucksfuel.com and glassybaby a hand-blown glass company are offering specials that take a percentage of sales and send it to hurricane relief. See 25 Companies Helping With Hurricane Harvey Relief
Fuel prices are driven up after a natural disaster by several factors. At the end of the day, most of the pricing changes are due to the simple economic principle of supply and demand. While this might not always satisfy drivers, there’s one silver lining on this dark cloud – the prices do tend to go back down before too long.
- The Economics of Disaster: Are Hurricanes Inflationary or Deflationary?
- Oil Refineries in the United States
- Gas vs. Oil Price Chart
- Inflation Adjusted Gas Prices
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