There wasn’t a shortage of petrol and diesel last week, but millions of people thought there was. Thanks to panic buying, we now have a shortage of petrol and diesel.

The story was the same with toilet paper last March. There was plenty to go round but the fear of running out made an Andrex drought a self-fulfilling prophecy.

Throughout the weekend, people in cars have been queueing up to buy fuel, sometimes for several hours. Some of them urgently needed petrol to get to work on Monday. Many of them did not, but felt they should fill up just in case. It is now estimated that between 50 and 85 per cent of non-motorway petrol stations have no fuel left to sell. Some people were not able to drive to work today. Others were stranded far from home after spending a weekend away.

This could have been avoided if petrol stations had raised their prices. Had they responded to a surge in demand by hiking the price of a litre of petrol from £1.35 to £2, for example, those who needed to buy it at the weekend would have been able to do so, and those who could wait a few days for the price to drop would have stayed away. The frivolous panic-buyer with his jerry cans would have had to bear the cost of his irrationality.

Such a move would be tremendously unpopular with non-economists, however, which is why petrol stations, for the most part, have kept prices at pre-panic levels. After two centuries of economic teaching, the idea of using the price mechanism to ensure the efficient allocation of resources remains counter-intuitive to many people. It leads to the charge of “price gouging”.

In his excellent book, Economics in One Virus, Ryan Bourne discusses public anger about prices rising during a crisis:

Whereas market prices before an emergency are deemed good, fair, and reasonable, market prices that rise significantly during an emergency are dubbed bad, unfair, and unreasonable. Firms are accused of profiteering. Where once we understood that supply and demand determines what we pay for things, now we imply that companies have complete discretion to set prices at whatever level they like, irrespective of consumers’ willingness to pay or the risk of being undercut by competitors.

With regards to the people who were condemning sellers on Amazon for putting up the price of facemasks, hand sanitiser and suchlike in the early weeks of the pandemic, Bourne writes:

Of course, news outlets were not complaining that prices of flights, restaurant food, sports merchandise, and hotels collapsed due to the very same supply-and-demand forces. Nobody, as far as I’m aware, was suggesting that consumers should be mandated to pay the old higher prices for these goods and services because it would be unfair to sellers to do otherwise.

Many parts of the USA have laws against so-called price gouging. Bourne says that price increases in California are limited to ten per cent. In Virginia, it is illegal to charge “unconscionable prices” for “necessary” goods, whatever they are.

When panic sets in and people start hoarding, laws against price gouging do not lead to reasonably priced goods being available to all. Instead, they lead to empty shelves. Those who are lucky enough to visit a shop after it has been replenished soon snaffle the lot, sometimes with a view to selling them on at a higher price themselves.

A temporary rise in the price of petrol would also create winners and losers. Petrol would obviously be more expensive for those who buy it during the brief period of higher prices and this would be particularly harsh on one often overlooked demographic, the low income motorist. But regardless of your income, it is better to have expensive petrol than to have no petrol at all if you rely on your car to get to work.

Affordable petrol for all is not an option

Moreover, being stuck in a queue for hours creates its own costs. Opportunity costs are often overlooked, even by some of the motorists waiting in line. This may be especially true in Britain where people cannot see a queue without wanting to join it. But if you value your time at £14 an hour, which is the average wage, a three hour queue costs you £42. In theory, this should be enough to deter people who do not have an urgent need for petrol from making the trip, but it obviously hasn’t deterred enough of them in recent days. The cost of one’s time does not feel as salient and “real” as a price hike at the pumps.

During this period of irrational panic-buying, affordable petrol for all is not an option. In practice, the choice is between making petrol available to all and keeping prices at their pre-panic levels. There are parallels with rent controls which, though popular with the public, are almost universally condemned by economists who know from bitter experience that capping the price of rents does not lead to an abundance of affordable housing. Instead, it leads to a shortage of housing and a decline in the quality of the housing stock.

If a product is consistently sold below the market price, it will soon run out. History has given us countless sad examples of this, usually caused by governments interfering with the price mechanism. Politicians are not directly to blame for the current situation, although there may be some political pressure on fuel companies to maintain prices. The failure to use the price mechanism to ensure that everybody has access to petrol and diesel has been primarily driven by the companies fearing the reputational damage of being accused of profiteering from a crisis by the economically illiterate public.

The crisis has been created by the madness of crowds, and the crowds have been given little disincentive to indulge their madness. The result is that most petrol stations do not have a drop of petrol, and the government is having to send in the army. The price of fuel has been kept “fair”. You just can’t buy any.