Thursday, May 25, 2006

Gasoline Supply and Demand 101

Gasoline Supply and Demand 101

Now that the Federal Trade Commission has said that an investigation by U.S. antitrust authorities found no evidence that oil companies illegally manipulated gasoline prices or constrained oil refining operations last year, we are seeing calls from democrat lawmakers for yet another investigation into these allegations. It is clear that one of two possible things are happening. One is that politicians are pushing this issue without regard for the truth. Yet clearly that is not the case, since our wonderful leaders would never stoop to crass politics in disregard for the truth just to further their own need to amass and retain power. The only other possibility is that they have a lack of basic economic education. It is clear to me, as well as the FTC, that supply and demand is at play here, but there are still some unusual price moves that bear further inspection. Like, why would a gas station raise its prices for gasoline absent a delivery of gasoline at a higher price? I recently detected such a suspicious price hike at my neighborhood Exxon station, followed by another hike less than a week later. Since I am already acquainted with the owner, and since I spare no effort in my quest for journalistic integrity, yesterday, when I spotted him there as I was filling up my SUV, I walked over to him and started asking questions. How, I asked, could he justify raising the price absent a price hike of his own, especially in these times of FTC investigations into price gouging by men such as he?

The answer, as he related it, was that, while he had indeed received no price increase, nor even a notification of an upcoming price hike, what he had received was a phone call from the distributor who supplies his station with gasoline notifying him that he should not expect his next delivery within the next week, as scheduled. It would be a few days late. Right away, he raised the price ten cents, to $3.29 9/10 per gallon of regular. A few days later, he got another call to schedule that delivery, and it was for a few days later still. He immediately raised his price another dime. That was why my 25 gallons of regular had just cost me eighty five dollars.

His explanation was simple - as a friendly neighborhood gas station, it was imperative to his business model that he always be open. People rely on that. In order to assure himself of a supply, which, as a franchised Exxon dealer he could only get from Exxon, he raised his price, so as to discourage motorists from stopping at his station, or to encourage them to buy less. In other words, since supply was restricted, the price went up. A textbook example of the law of supply and demand. Barbara Boxer, take note. Instead of recognizing the beautiful elegance of the most basic law of economics, Sen. Barbara Boxer, (D) California, said when the FTC chair said she could find no evidence of oil company wrong doing: "That answer shows your true colors in terms of your lack of empathy and understanding with your basic mission."

So, it's not about economics at all, Instead, it's about "empathy and understanding." Who knew? I thought that we elect these people to enact legislation to help us deal with the real world. You know, stuff like punishing criminals, enforcing contracts, and ensuring fairness. But what we get is "empathy and understanding." I think it's time for someone to get ahold of Barbara Boxer and talk truth to power. And not just Boxer. She may be the easiest target, but many other Congresscritters seem bound and determined to pass a law to fight this nonexistent threat. Is it possible that all of them are unaware that legislation that artificially reduces prices will (always) cause shortages? Maybe it's just me (and a few million others) but I am glad that my friendly corner gas station has thoughtfully made it possible to always be able to count on his station having gasoline available. I know where I can go, within ten miles of my house, where I can get gasoline for $3.10. But I like the convenience of the corner station. I gladly pay 20 cents for that convenience. The 55 cents of tax on each gallon, I am maybe a bit less glad to pay. But aren't we experiencing a movement, of which Barbara Boxer is an intrinsic part, to raise those very taxes? And, not incidentally, increase the price we pay for fuel, so that we are encouraged to use less fuel in the first place? It may be too much to expect consistency from those in power, but I wish they would be a little less credulous. And I hope that they refrain from burdening us with any more "empathy and understanding." Maybe they don't need an education in economics. They need, instead, to be a little more honest.