Arizona Crisis: Movement Of Supply And Demand

Arizona Crisis: Movement of Supply and Demand

The summer of 2003 had the governor of Arizona saying “Keep cool, take a deep breath, and do not top off your tank” (CNN.Com). These comments were made when Arizona saw a sharp increase in gasoline prices. Phoenix was predominantly hit hard when the average price of gas in the first week of August was $1.52 and by late August the price had crest at $2.11. This price increase that had the governor of Arizona so concerned was a result of an event that occurred on July 30, 2003 causing a shift in the supply and demand curves.

This event involved an 8 inch gasoline pipeline operated by Kinder Morgan that ran through Tucson and Phoenix that was temporarily shut down on July 30th as a preventative step in connection with an ongoing investigation into a rupture within the pipe. The pipeline was supply for three million consumers in metro Phoenix and Maricopa County supplying at least half of their supply of gasoline (Associated Press). The lack of supply from the shutdown pipeline immediately reduced the volume of gasoline available to Arizona residents. Phoenix alone saw a decrease of 30 percent in its supply of gasoline from this shutdown. Also, this decrease in supply caused a price increase for gasoline. This increase in price was necessary to attract additional volume, reduce demand and possibly would eliminate closure of gas stations because of no supply. According to William Kovacic of the FTC, “The price increases that occurred when the supply of gasoline dropped is considered normal because the significance of the product to the consumers. The necessity of a price increase became vital to reduce immediate demand to equal the level of available supply”. Additionally, the diminished supply of gas had wholesale suppliers reporting scarcity of gasoline and their pumps were shutting down. Arco who operated 77 stations reported problems of station inventories being used up and many of their stations closing. There were reports of long lines which had consumers waiting for as much as two hours at most of the operating stations. As the gas lines grew the gas prices soared. In one week the price increased 30 cents from the previous week. Reports came in of prices reaching $2.15 to $2.20 when consumer lines were at their longest. This increase in price was not only felt within Arizona and the Phoenix area, Southern California and Las Vegas felt the ripple effect. The justification behind this ripple affect in Southern California and Las Vegas was that L.A. suppliers were being diverted to Phoenix to replace the Texas supply (Garay, 2003).

This event that occurred with the gas pipeline in 2003 created a movement within the supply and demand curves. Firstly, the supply of gasoline was seriously reduced causing a shift in the supply curve. This shift in supply moved to the left creating an increase in the equilibrium price.

Secondly the demand for gasoline rose when consumers panicked and apprehension of price increases rose. The consumers expectations of a price change in the future increases the current demand as the consumers increase the quantity they purchase in anticipation of the increased price changes. This causes the quantity demanded to increase