A Moron's Guide to Gas Wars
April 26th, 2006Gas prices are all the rage these days. This morning I awoke to find headlines on every major newspaper citing Bush's plans to combat rising gas prices across the country.
More often than not some idiot somewhere comes up with a "brilliant" plan for the people of the world to unite and squash those evil corporations who are greedy and are taking all our money. It makes little difference to them whether or not simple supply and demand forces are the root of the problem. In the last 2 days my in-box has been bombarded with an email entitled:
Gas War - How to Bring Prices Down
My reception of so many copies of this from so many different places is evidence of one thing - our schools do a horrible job of teaching economics. If you would like to read the text of the message I have posted it below. I will post my comments now so they don't get lost at the bottom of this post.
Let's first look at what would happen if everyone took the advice of this email and stopped purchasing gas from Exxon. One of the largest factors in the cost of gas is the transportation and distribution of oil. Drilling for oil, transporting it, refining it, and distributing gas is a major undertaking. Companies cannot just ramp up supply overnight. Increasing supply is a very time and capital intensive process and one that cannot react quickly to short term shifts in demand.
That being said, if millions of people suddenly stop buying gas from Exxon then where are they going to go? All the other gas stations, that's where. What happens when demand rises by say 33% at a gas station with no accompanying rise in the supply? The PRICE WILL RISE! The chart I am providing is for illustration only. It may or may not reflect the true slope of the demand curve for gas. If the current demand is 30 people per hour at $3 per gallon (point A) and there are suddenly 33% more people demanding the gas, the price will rise to say $4 per gallon (point B). So the boycotting of Exxon is artificially reducing the supply and thereby causing a rise in demand and gas prices everywhere else.
The only thing that would remedy this situation is a corresponding rise in supply but will that happen? No, not in a short enough time frame for it to matter. How long are you willing to pay higher prices in the hopes that Exxon will eventually lower theirs? People will begin to see that Exxon's prices are now the lowest and will return to purchasing gas there, thereby returning the market to equilibrium. Now, there are some more complicated factors that work into this equation but this discussion is sufficient enough to give an idea of what would happen. If people understood more complicated economics then this post would be unnecessary.
This plan is idiotic and the fact that so many people believe it will work appalls me. With regrets here is the text of the message (sic):
This was originally sent by a retired Coca Cola executive It came
from one of his engineer buddies who retired from Halliburton. It's
worth your consideration.
Join the resistance!!!! I hear we are going to hit close to $ 4.00 a
gallon by next summer and it might go higher!! Want gasoline prices
to come down? We need to take some intelligent, united action.
Phillip Hollsworth offered this good idea. This makes MUCH MORE
SENSE than the "don't buy gas on a certain day" campaign that was
going around last April or May!
The oil companies just laughed at that because they knew we wouldn't
continue to "hurt" ourselves by refusing to buy gas. It was more of
an inconvenience to us than it was a problem for them. BUT, whoever
thought of this idea, has come up with a plan that can really work.
Please read on and join with us!
By now you're probabl y 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?
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. But to have an impact, we need
to reach literally millions of Exxon and Mobil gas buyers. It's
really simple to do! Now, don't wimp out on me at this point...keep
reading and I'll explain how simple it is to reach millions of
people!!
I am sending this note to 30 people. If each of us send it to at
least ten more (30 x 10 = 300) ... and those 300 send it to at least
ten more (300 x 10 = 3,000)...and so on, by the time the message
reaches the sixth group of people, we will have reached over THREE
MILLION consumers.
"It is what you read when you don't have to that determines what you will be when you can't help it."
-Oscar Wilde
Disclaimer: this post is for informational purposes ONLY. Please read the disclaimer before even thinking about relying on me to make a financial decision!
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