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My Ramblings

Gasoline Prices

Posted on | May 13, 2008 | Comments Off

I recently received an e-mail calling for yet another creative boycott to lower gas prices. So I decided to put this myth to bed. While this boycott method is considered new, it really isn’t. This has been tried before.

In a nutshell, this is the theory

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.

There are two primary problems with this strategy:

Problem #1: people aren’t going to wait for gas to be much lower before they switch. For example, if everyone stopped buying gas from company A and B , then companies C, D, and E have no incentive to lower their prices, because the demand for their product just increased by a factor of 20%. So they will raise their prices 20 cents to keep up with the demand. In the mean time, companies A and B that have no demand will lower their price, say 20 cents or so. Now we have some companies that have gas for 40 cents more than the others. Most people aren’t going to pay the difference; they are going to switch back. Now the demand will swing back to the lesser price companies, switching the demand back to them. Then the reverse will happen.

This of course is theoretical, in real life, the price difference would be much less. It would only take a 5 cent difference between companies before people switch over to the cheaper price.

Problem #2: automobiles aren’t the biggest consumers of petroleum products. I’m not sure what the percentage is, but I’ll bet that automobiles only account for 25% or less. So if you are a company like Fedex or American Airlines that consumes fuel in the millions of dollars per year, 5 cents a gallon difference probably just saved you $75,000 a day. The stockholders in those companies aren’t in it to make a political stand, they just need a return on their money so that they can retire without working at McDonalds till they’re 80. They aren’t going to have a lot of patience for loosing that much money.

That doesn’t account for all the non-vehicle forms of petroleum products like the fertilizer people, the PVC and vinyl people (flooring, house siding, pipe’s, laundry baskets, etc), and many others.

The answer to the gas price problem isn’t some temporary creative boycott stunt, it is to increase the supply in a real and permanent way. That means more drilling and more refining capacity. To have more drilling capacity means that the drilling companies need fewer obstacles put in place by the government regulators.

Unfortunately, with the lack of real political leadership by either major political party in this country at the moment, the problem is not going to go away anytime soon.

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