The Price of Gas

OK, so we all know the gas prices all over the world are out of control. The oil companies are making a ludicrous profit. And we can’t seem to find a more efficient and practical source of energy to replace the burning of refined fossilized ancient plants from beneath the earth. Now I’m no economist, but I think it’s pretty obvious to me why the prices are so high and yet at the same time the companies make a huge profit. Yet, it probably isn’t the same reason that everyone seems to think is the obvious answer.

So the obvious answer is that instability in the middle east, higher demand, lower supply, insecurity of oil fields, etc. all contribute to the higher price of oil. OK, that makes some sense. But the United States gets most of its oil from Venezuela, Canada, itself and I hear even Russia now. So little comes from former Persia that it shouldn’t make a significant difference. The other obvious answer is that in the US there is very little public transportation, and most people have to drive no matter what. So the gas station can charge whatever it wants and get away with it. It’s true, but in the 70’s when there was a fake shortage and people were waiting in line for gas people would drive mopeds and car pool. People aren’t doing that today.

Now usually if you are in the business of selling something, and that good you are selling has an increasing demand and decreasing supply, you raise the price on that good. However, since we have capitalism, you can’t raise it more than the other people selling the same good or else you’re SOL. When prices are high, people are more likely to shop around for the better price. Given that, how can the profits of the oil companies increase while supply decreases and demand increases? I mean, its not surprising there is SOME increase, but such a tremendous one surely requires further explanation.

The answer is obvious to anyone who thinks about it. The oil companies are not competing. There is no capitalism for them. Because they don’t have to compete with each other they can raise the price, for fake or real reasons, and everyone has to pay. The competition is not between the gas companies, but the gas stations. When you go to the grocery store it is your decision to buy Cheerios or Corn Flakes. And if you choose one over the other the retailer purchases more of that particular brand. And thus, the cereal companies compete directly.

Gas companies do not compete directly. The gas stations are competing with the other gas stations that are on the same road, intersection and town. But a Mobil station buy Mobil gas, no matter what. And the Hess station buys Hess gas no matter what. And the gas station owners only mark up their wholesale price buy a cent or three. If the wholesale price that one gas station pays happens to be significantly lower than another, then you’ll see them charge a few cents less for gas. Sure, overall they get maybe a little more business than the other station. But never have I seen two stations, one a few cents cheaper, where one was full of cars and the other empty. Various other factors such as number of pumps, side of the road, speed-passes, credit cards, etc. even out the field. I guarantee that every gas station that stays in business takes full shipments of gas regularly.

So, how to fix it? How to end the virtual price-fixing of big oil? Make gaseterias. One gas station that sells multiple brands of gas. If you drive up to the pump instead of seeing Mobil regular, plus, special and diesel you see 4 or 5 different brands of gas in three or four octanes each, then the oil companies will be forced to compete directly with each other. When people need to fill up they hit the nearest gas station, whatever it may be, Hess, Exxon, Shell, etc. But if the nearest gas station offers multiple brands of gas all with equivalent markup by the gas station owner, then the oil companies will have to compete with each other. Because you know damn well that people will consistently choose the cheapest brand every time until the station is out of gas. I guarantee that if this is done, then gas prices will drop by dimes per gallon almost immediately. If they don’t, then it can only mean that there is a price fixing conspiracy between the oil companies. That is not something out of the realm of possiblity.

Keep in mind though, I am not an economist. But this sure as hell makes a lot of sense to me. It should, I thought it up on my own. But if you are an economist or see any flaw in this thinking, I’ll be glad to hear it. As for me, I use the train and my feet to get around.

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