I received a chain email last night from a friend who’s a very smart guy (a music professor at a prestigious local university) and frustrated, like most of us, with the high cost of gasoline. Here’s the plan for fighting back:
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 IT 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 now are 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.
[…]
I suggest that we not buy from EXXON/MOBIL UNTIL THEY LOWER THEIR PRICES TO THE $2.00 RANGE AND KEEP THEM DOWN. THIS CAN REALLY WORK.
No, it can’t.
If people followed suit, Exxon/Mobil might go out of business, although I suspect they’re sufficiently diversified to handle a loss of U.S. gasoline sales. But companies can’t sell products very long at a cost below what it costs them to bring them to market. And, no, they can’t make it up with volume.
Further, boycotting one supplier would actually push up gas prices!
Gas is a commodity. Commodity markets work on the principle of supply and demand. When supply is higher than demand, sellers lower the price until the two factors equalize again. When demand is higher than supply, sellers raise the price to curb use and stretch supplies until, once again, the two factors equalize.
Just for the sake of argument, let’s say we successfully organize the ExxonMobil boycott. ExxonMobil loses business and lowers prices to lure you back. The other stations will follow suit and lower prices to compete, right? Not quite.
To avoid ExxonMobil you go to the Speedway across the street, instead. Speedway’s business increases, causing them to raise their prices to try to control demand, otherwise their supply would be quickly depleted. Their higher prices drive customers to Shell, who in turn raise their prices and drive customers to BP, and so on. Eventually, supply and demand will equalize and all stations will have the same price again.
As consumers, we can do little to control supply, but we can control demand. However, effectively doing so means reducing demand overall, not just at one station. The reduction in demand must be severe and long-lasting. If you want to save money at the pump, slow down on the freeway, plan outings to get everything in one trip, walk more and trade in that gas-guzzling SUV for an economical compact car for starters.
A quick Google search reveals this scheme has been around since at least 2000. But it continues to seem plausible to plenty of people, including perfectly bright people who pay attention to world events. Clearly, people just don’t understand how prices are set and they’re outraged that they’re struggling to pay more for gas while the fat cats at the oil companies keep getting richer.
So, why are gas prices so high? The federal Energy Information Administration puts it succinctly:
The cost of crude oil now accounts for almost 70% of the gasoline pump price. World crude oil prices are at record highs due mainly to high worldwide oil demand relative to supply. Other factors contributing to higher prices include political events and conflicts in some major oil producing regions, as well as other factors such as the declining value of the U.S. dollar (the currency at which crude oil is traded globally).
So, the cost of crude oil — the chief component of gasoline — is going up and the value of the dollar is going down. Meanwhile, the booming economies in China and India mean that another couple of billion people are competing to buy crude oil.
Are oil companies reaping record profits? Sure. They’re taking a small percentage of overall sales as profits, just like other businesses. As prices go up and demand remains constant, they’re getting a percentage of a much larger pie. But they’re not pocketing an extra dollar for each dollar increase in the price of gas; otherwise, a less greedy competitor would settle for a mere increase in 75 cents a gallon and get all the business.
For more background, see Steve Verdon’s essay from last year, “Price Gouging and Posturing Politicians.”
