The Long Run Blog

Critical Thinking on Money, Finance, and Economics

Not This Email Again: Gas War!

I just keep getting this email forwarded ad infinitum.  You know the one- that email that tells us how to beat the oil companies at their own game by starting a price war.  Here are the pertinent excerpts from the email:

GAS WAR! Join the resistance!

The only way we are going to see the price of gas come down is if we hit someone in the pocketbook by not purchasing their gas!

And we can do that WITHOUT hurting ourselves. How? Since we all rely on our cars, we can’t just stop buying gas. But we CAN have an impact on gas prices if we all act together to force a price war.

Here’s the idea: For the rest of this year, DON’T purchase any gasoline from the two biggest companies (which are now one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit.

This all boils down to basic supply and demand.  If demand exceeds supply, the price will rise and vice versa, until a price is set which equates available supply with current demand.  If we all decide to buy from Conoco or Shell instead of ExxonMobil, our total demand will remain unchanged as will total supply.  How will Shell meet this new demand?  By raising prices, of course!  Where will they get the needed fuel for all this new demand? From Exxon of course!  All that was accomplished was a net increase in the retail price because of a shift in the efficiency of distribution (gotta move that gas from Exxon to Shell and Exxon will want its fair share of the higher price).  The dumbest version of this email I have seen to date is the one that suggests boycotting gas purchases on Tuesdays.

The only two things that will change the price of gas is a material change in supply or demand (or both).  Unless the next email espouses filling your tires to proper inflation levels and driving less, net demand will remain the same while supply is up to the engineers, planners and decision makers at Exxon, et al. and Saudi Aramco.

I am kind of making fun of this email which actually appears to be more of an attempt to create yet another chain letter under the guise of something we care about, but while on the subject it bears mentioning the reason behind an otherwise accurate perception.  People often complain that gas prices rise quickly and fall slowly (those oil bastards!)  While the conspiracy theorist would love to find evidence of collusion, the explanation is a lot simpler: inventory.  Say your local station ‘A’ buys 20,000 gallons of fuel at say $3.25 to sell at $3.35 on Tuesday and it takes a week to sell most of that.  The station across the street, SB, fills its tank on Friday after oil prices fell all week.  Station B pays $3.00 and decides to sell it at $3.25.  How can Station B sell fuel at a higher margin as prices fall?  Station B knows its competitor bought on Tuesday at higher prices, so needs to price just under SA’s current price until SA gets a new shipment.  Station A won’t lower its price because why should it take a loss on every gallon when people need the fuel anyway? Station A just accepts a slower sales week, but a profitable one.

So instead of prices falling to $3.10 as would be expected by the $0.25 drop in the cost of fuel, it drops a mere $0.10 for a few days at just one station.  It takes time to work through the inventory and competitively lower prices.  On the contrary, raising prices can be done as soon as the station across the street does so.  And why shouldn’t it, unless the attendant is just too lazy to adjust the sign?

Another reason is consumer behavior itself: when prices are rising, we generally rush to fill up and essentially end up hoarding gas (temporary excess demand).  When prices are falling, no one is in a rush to fill up, nor do we seek out the best price (less competition).

October 23, 2008 - Posted by | Economics, Internet Scams | ,

1 Comment »

  1. What a weird time to get this email anyway, prices have been falling.

    Comment by wastrel333 | October 24, 2008 | Reply


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