When I was writing my New York Times column on the gas tax, my editor pushed me to argue that other economists were underestimating the price-sensitivity of the supply of gasoline. I resisted. A wide range of economists seemed to agree that refineries were running at capacity. On the left, Krugman argued:
Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving. Any elasticity in the supply comes earlier in the year, when refiners decide how much to put in inventories.
On the right, similarly, I'd often heard free-market economists blame our energy troubles on regulators' decades-long refusal to site any new refineries.
When economists reach this broad of a consensus, I normally defer to it. But after writing my op-ed, I started paying more attention to the interaction between oil and gas prices. And frankly, I'm finding it pretty hard to buy the refinery bottleneck story. Did you notice how quickly the price of gas seemed to respond to the recent fall in oil prices? If the bottleneck story were true, the price of gas would have stayed at $4.00 to ration a fixed supply - not dipped to $3.60 in a matter of weeks.
The lesson, I suspect, is that outside observers - economists included - tend to underestimate elasticities. It's tempting to slide from, "I can't think of any way to expand gasoline production under existing conditions," to "No one knows how to expand gasoline production under existing conditions." But it's a temptation we've got to resist, because industry insiders see margins of flexibility that outsiders can barely imagine.