When  I write about gasoline pricing, I inevitably hear from readers who think  prices shouldn’t rise until stations sell all the  ”cheaper” gasoline in their underground tanks.  St. Louis Federal Reserve Bank economists William Emmons and Christopher J. Neely have a response for these puzzled consumers:  In the latest issue of the Regional Economist, they explain why  your local retailer  must react quickly to changes in global markets.

It may look like collusion when every station raises its price simultaneously, but it’s not, Neely and Emmons say. They make their point by imagining a situation where one station tries to be “pro-consumer” and cushion the blow of a $1-a-gallon  increase.

Suppose first that only Conch Gas had held its price at $1.999, while Pegasus Gas had raised its price to $2.999. Conch Gas obviously would have captured all of the traffic that day, but its storage tank would have run dry much sooner than expected. By the first or second day after the overseas disruption in the oil market, the owner-manager of Conch Gas might as well have gone on vacation — although she would have been better off if she worked throughout the week and charged the higher price. …  The manager of Conch Gas will not make this pricing mistake again.

If both stations hold the line at $1.999, they’ll only attract out-of-town bargain hunters and locals wanting to top off their tanks.  They’ll both be out of business, and nearby residents will be inconvenienced, when the tanks run dry.

Try to remember  the story of Conch and Pegasus the next time you hear a politician complain about price gouging.