Why Economists Can’t Stand Shortages
Mexico’s gasoline shortages and the lessons of the U.S. gasoline crises of the 1970s.
Drivers in eight Mexican states are facing around-the-block queues to buy gasoline this week. Many stations have run out of gasoline altogether, and drivers are being urged to drive less.
The whole scene is eerily reminiscent of the U.S. gasoline crises in the 1970s. In terms of the basic economics, this is the same story all over again — bad policies imposing large costs on consumers.
Supply Shock
Both shortages started with a large decrease in supply. The U.S. shortages were started by international events — the OPEC oil embargo in 1973 and the Iranian revolution in 1979.
With Mexico, the decrease in supply is entirely self-inflicted. Starting in late December, newly-elected Mexican President Andrés Manuel López Obrador (“AMLO”) shut down several of the main pipelines that distribute gasoline throughout the country. Concerned about rising levels of gasoline theft from the pipelines, the idea was to switch to tanker trucks accompanied by armed vehicles.
Transporting fuel via tanker truck is arguably more secure, but also slow, complicated, and expensive. Consequently, there have been large delays in gasoline and diesel deliveries. The bottlenecks have also slowed Pemex’s ability to offload imported fuel from tanker ships, leading to a long queue of tanker ships at Mexican ports waiting to unload.
AMLO’s decision to shut down the pipelines has been widely criticized as a rash move by a headstrong “I know best” president. The new approach to distributing gasoline simply has not been up to the challenge.
Price Controls
But there is another piece of the story that has been missed so far. To create a shortage, you need two key ingredients. A supply reduction, by itself, is not enough. You also need price controls. The gasoline queues in the U.S. in the 1970s only happened because of the price controls that President Richard Nixon had imposed on gasoline.
Remember the gasoline lines of 1991? Of course you don’t. They never happened. Although global crude oil prices spiked in 1991 when Iraq invaded Kuwait, retail gasoline prices increased right along with them. Some journalists wondered if the U.S. was headed for gasoline lines again, but without price controls there was no shortage and no queues.
Mexico does not have explicit price controls like the U.S. did in the 1970s, but there are implicit price controls that have a very similar effect. The retail gasoline sector in Mexico is beginning to open up to competition, but there is still political pressure on gasoline stations not to raise prices. AMLO himself earlier this week explained that the Mexican government is keeping a close eye on gasoline prices, profit margins, and whether or not there is “real competition” in the retail market.
In addition to political pressure, gasoline retailers may be worried about long-term reputational consequences. Increasing prices could be viewed as “gouging” consumers during the crisis, and could lead to social media backlash and consumer boycotts. We see these same reputational concerns in the U.S. during hurricanes and other natural disasters and, indeed, some U.S. states even have explicit price regulation during emergencies.
Rationing by Queueing
The irony is that, in attempting to protect consumers from price increases, you end up hurting them more. When you have a supply shock and price controls, the result is a shortage. Demand exceeds supply.
Which then raises a critical issue. Who gets gasoline? There isn’t enough for everyone. So what happens is that people get in line and wait. The problem is that queueing is a terribly inefficient approach to clearing a market.
The queue increases the effective price of the good. But, as we are seeing in Mexico this week, the queues often have to get very long. Essentially, the queues have to get long enough so that the effective price of the good is the same as it would have been without the price controls.
Economists hate queueing because this waiting is pure waste. Time spent in a queue is time you aren’t engaged in some economically productive activity. You aren’t consuming leisure. You are just wasting your time. Economists have documented that the U.S. gasoline shortages imposed huge economic costs from waiting (see here and here). Nobody wants to wait for two hours to buy gasoline, but this is what happens during a severe supply shock when prices aren’t able to adjust.
Lobbying for Fuel
During a shortage you also have additional wasteful rent-seeking behavior. Without a price mechanism, the gasoline stations themselves and other wholesale gasoline buyers are now forced to lobby for more access to supplies. This is already happening with companies contacting Pemex asking for larger allocations of gasoline. All of these trips to Mexico City, calls to AMLO, and meetings with Pemex to negotiate a bigger piece of the pie are socially wasteful.
All this jostling for scarce fuel supplies also likely reinforces the implicit price controls. Gasoline retailers are desperate for more supply, so the last thing they want to do is to anger the Mexican administration by increasing prices. Under the current system, Pemex has a great deal of discretion about who receives the scarce supply of gasoline and diesel, and you could imagine a retailer being “black-listed” if they decided to increase prices.
Instead, gasoline retailers are seeking alternative supplies. BP, Repsol, and other gasoline retailers are considering using private trucks, rail, and other alternatives to avoid Pemex altogether. That retailers are pursuing these options is a bit depressing, because it implies that the retailers expect these shortages to continue. Moreover, there are anecdotal accounts that Pemex-branded gasoline stations are being prioritized over internationally-branded stations which would indeed make these stations nervous and potentially regret their decision to enter the Mexican market.
Conclusion
You could argue that the Mexican shortages are an even larger policy failure than the U.S. gas queues during the 1970s. Whereas the U.S. crises were sparked by international events, Mexico is suffering from self-inflicted wounds. Gasoline theft is a real problem, but shutting down the pipelines is the wrong way to go about addressing the issue, particularly given the implicit rigidities in Mexico’s downstream market. Mexico faces enough challenges without forcing drivers to wait in line for hours to buy gasoline.
For more see Davis, Lucas W., Shaun McRae, and Enrique Seira Bejarano “An Economic Perspective on Mexico’s Nascent Deregulation of Retail Petroleum Markets,” Economics of Energy & Environmental Policy, forthcoming.
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Suggested citation: Davis, Lucas. “Why Economists Can’t Stand Shortages.” Energy Institute Blog, UC Berkeley, January 14, 2019, https://energyathaas.wordpress.com/2019/01/14/why-economists-cant-stand-shortages/
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Lucas Davis View All
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is a Faculty Affiliate at the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Research Associate at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.
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