Here?s what one reader wrote: “Williams, I can understand how the destruction of Hurricane Katrina and Middle East political uncertainty can jack up gasoline prices. But it?s price-gouging for the oil companies to raise the price of all the gasoline already bought and stored before the crisis.” Several other readers made similar allegations. Such allegations reflect a misunderstanding of how prices are determined.
Let?s start off with an example. Say you owned a small 10-pound inventory of coffee that you purchased for $3 a pound. Each week you?d sell me a pound for $3.25. Suppose a freeze in Brazil destroyed half of its coffee crop, causing the world price of coffee to immediately rise to $5 a pound. You still have coffee that you purchased before the jump in prices.
