Different River

”You can never step in the same river twice.” –Heraclitus

April 21, 2006

Bad Gas Economics

Filed under: — Different River @ 3:08 pm

I was recently sent an e-mail which is apparently circulating around the internet asking everyone to stop buying gas from Exxon-Mobil. (Exxon and Mobil merged a few years ago and are now the same company.) This is, supposedly, a sure-fire way to force gas prices down. The claim is:

By now you’re probably thinking gasoline priced at about $1.50 is super cheap. Me too! It is currently $2.79 for regular unleaded in my town. Now that the oil companies and the OPEC nations have conditioned us to think that the cost of a gallon of gas is CHEAP at $1.50 – $1.75, we need to take aggressive action to teach them that BUYERS control the marketplace..not sellers. With the price of gasoline going up more each day, we consumers need to take action. 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? Force a Price War. That’s right. A Price War.

Since we all rely on our cars, we can’t just stop buying gas. Not ALL gas, anyway. But we can stop buying a PARTICULAR gas. Do you see where this is going?

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. From there it’s simple Economics 101: 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, because if the price is right, we’ll start buying the cheaper gas. Get it?!

Sorry, but that’s not “simple Economics 101.” I know — I’ve taught “Economics 101″ (only now it’s called “Principles of Microeconomics — but I digress).

Their “theory” is that by reducing demand for Exxon/Mobil gas, Exxon/Mobil will have to cut their prices. But if everybody switching all their gas purchases to other companies, there would be MORE demand for OTHER companies’ gas, so by exactly the same logic, the other companies will RAISE their prices.

And even if enough people did this long enough to force Exxon/Mobil to lower their prices, the other companies would NOT have to match — because the other companies are selling more gas than every at the higher prices because of this e-mail.

The author of this “plan” seems to think that there is some outside factor that forces gas companies to lower their prices when other gas companies lower theirs. But in truth, companies have to match competitors’ lower prices ONLY when they are losing sales by having higher prices. If this plan is implemented, the other gas companies will not be losing sales, because the whole point of this “boycott” is to get people to buy gas from these other companies “for the rest of the year,” even when their prices are higher. The boycott of one company is, by its very nature, self-defeating.

The “magic factor” that forces companies to match competitors’ lower prices is the fact that customers will go and buy from the companies with lower prices. In other words: If, by some miracle, everybody in the U.S. refused to buy from Exxon-Mobil, and Exxon-Mobil saw this drop in demand and lowered their prices, then the other companies would see an increase in demand and raise their prices. As long as the “boycott” of Exxon-Mobil continued, there would be absolutely no reason for the other companies to lower their prices to match Exxon-Mobil’s lower prices — since the other companies wouldn’t be losing sales to Exxon-Mobil because of the “boycott.”

And this situation would continue until either (a) customers saw the lower prices at Exxon-Mobil and started buying from them, causing the situation to revert bag to what it would have been without the boycott, or (b) the other companies will buy and refine more oil to meet their higher demand, and Exxon-Mobil would stop buying and refining oil to avoid having their inventory pile up, with the result that the same amount of gas is sold, and at the same prices, as otherwise would have sold — just through different gas stations. If somehow this boycott persisted over time, then eventually, Exxon-Mobil would eventually either sell oil and gasoline to other companies, or would change the signs on their gas stations, or would sell their retail gas stations to other companies, and become a wholesaler.

In short, there is absolutely no reason that this strategy would reduce gas prices — even if they succeeded in getting everyone to boycott Exxon-Mobil. Which they wouldn’t anyway — since as soon as Exxon-Mobil’s price started to drop, people would switch over to buying from them, and their price would go back up to what it was before.

I don’t know who wrote that e-mail, but I highly doubt they learned it in “Economics 101.” If that’s what they think they learned, then they should have flunked.

One Response to “Bad Gas Economics”

  1. Fred Fry Says:

    One BIG problem in this plan in addition to what you already mention; The oil companies regularly sell gas and diesel to each other!

    Are you short in an area? Trade some somewhere else where Exxon is short.

    This whole plan ignores that Exxon has customers other than joe SUV driver, starting with the airlines and the shipping companies. Something tells me that Exxon is not concerned about this. There is not enough oil to meet the demand. Their oil will be wnated by someone.

    What is wrong with America. This company is making a fortune. Why not say, me too and buy some shares?

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