Can 'gouging' be a good thing?

• Author: Leonhardt, David
• Position: NEWS ANALYSIS - Oil prices, oil companies

When ExxonMobil, the largest oil company in the world, announced last month that its quarterly profits had surged 75 percent, to $9.9 billion, there were roars of indignation in Washington. Politicians from both parties warned that oil companies would have to convince the public they were not taking advantage of energy shortages and natural disasters like Hurricane Katrina to raise gas prices and their profits.

"If there are those who abuse the free-enterprise system to advantage themselves and their businesses at the expense of all Americans," said Republican Senator Bill Frist of Tennessee, the Majority Leader, "they ought to be exposed, and they ought to be ashamed."

SUPPLY & DEMAND

Faced with sudden price hikes, at the gas pump or in the cost of a plane ticket at Christmas, consumers and politicians alike often imagine an evil practice at work: price gouging. But is it as terrible as its name sounds?

That may depend upon whether you're looking at your own wallet or at the economy as a whole. Take the aftermath of Katrina, which devastated the Gulf Coast in August. The price of lumber and other building materials shot up after the storm. Demand for these items was suddenly higher, and sellers knew that they could charge more. So they did, in what may have seemed like acts of pure greed.

Now fast forward to next spring, when the snow has melted and a good number of homeowners around the country will start to think about building a new deck or adding a room to their house. Around the same time, the reconstruction of New Orleans should be in full swing.

Both New Orleans and all those home-improvement projects will need lumber, nails, and manpower, and most can agree that New Orleans deserves priority: Its houses and schools should be rebuilt before homeowners elsewhere spiff up their yards. With renovation costs higher, some homeowners will delay their projects until prices come back down. That will make more materials available for New Orleans and help reduce prices.

The price of gasoline also spiked after Katrina. The details were different (rather than demand rising, with oil operations in the Gulf shut down, supply shrank), but the dynamic was the same as with lumber: With not enough gas to go around, it suddenly became more expensive.

When prices at the pump rise sharply, drivers may suspect that they're being taken advantage of. "People work hard for their money, and the last thing you want to do is spend an extra 50 cents a gallon...