Post-Katrina, there has been underpricing by some major refiners and retailers in an attempt to avoid political or actual prosecution. This has resulted in out-of-gas situations at some gasoline stations, even as people try to flee Rita. This problem is likely to become much worse post-Rita. Gas prices will likely need to go a good deal higher to the extent that refining capacity is interrupted, yet there is a good chance that prices will not go high enough, given the policitcal circumstances. Closed service stations will tell the tale, and even with such underpricing there will still be charges of "price gouging" and "unconscionable pricing."

The clarion call to oil companies and politicians from economists, consumer advocates, and environmental groups (the last who believe that oil prices are below "social costs") should be "price to clear the market," not "hold the line on prices."

Consumers do not really save money when gas is not conveniently available and time is wasted in gas lines. There is mental strain just knowing that gas may not be available to support routine activities or for that emergency moment as is the case today.

We have a strong intellectual case for full pricing. Here are some points that come to my mind. This is likely to be a big issue for some time, and expect congressional hearings and calls for price controls, allocation controls, and windfall profits tax, which will make the disaster even worse.

Market-clearing pricing:

1) discourages tank topping, thus creating more effective supply; it discourages hoarding.

2) empowers consumers with optionality--the ability, the choice, of buying gasoline;

3) reduces gasoline lines, which waste fuel, wastes critical time during evacuation, and create unnecessary emissions (it is ozone season during hurricane season);

4) encourages conservation, where consumers see the real scarcity price and act accordingly (carpooling, etc.)

5) provides the correct market signal to refiners and other industry parties to eke out more supply in the short term and, longer term, increase total capacity.

"Buffer of Civility"
If oil pricing becomes more politicized and physical shortages/gas lines result, we are back to the summer of 1979. There will be civil disobedience in the gas lines, and it will bring out the worst in all of us. I would like to share a quotation from a Wall Street Journal opinion-age editorial of June 26, 1979, published in the wake of a fuel riot in Levittown, Pennsylvania. (Scattered gunfire, arson, vandalism, etc. were happening elsewhere in the shortage environment.)

Simply entitled "Buffer of Civility," the op-ed read in part:

"Classical economists used to list among the virtues of the price mechanism that it avoided social strife. It did not set group against group, they taught. In our lifetime … we have generally allowed prices to allocate goods among different end uses. It worked so smoothly we did not understand what the classical economists meant; today, we see. In addition to its economic virtues, the price mechanism is a vital buffer of civility."

It will be not only economically efficient but also civil to allow prices to work their magic in bad times, as in good.