Gas Crisis – Exxon/Mobil and the Unintended Consequences of Action

I was sent an email by a family member about how to impact gas prices.  It started off with quite a come on:

THIS IS NOT THE ‘DON’T BUY’ GAS FOR ONE DAY, BUT IT WILL SHOW YOU HOW WE CAN GET GAS BACK DOWN TO $1.30 PER GALLON.

This was sent by a retired Coca Cola executive. It came from one of his engineer buddies who retired from Halliburton. If you are tired of the gas prices going up AND they will continue to rise this summer, take time to read this PLEASE.

I should have known we were in trouble when I saw that engineers were involved with this economics shenanigan.  I say that in jest since one of my undergraduate degrees was in engineering.  I was curious about this one since most of the ideas revolved around not buying gas for a day.  Bill O’Reilly certainly had this plan a while back, and it seems to come up every now and again.  Of course, it has proven completely ineffective as no one signed up for the plan.  People need gas in their cars.  However, this plan promised to have a new twist on the problem, so I read on:

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?

How indeed?  The premise here is that the consumers are in control of the market, and that we can act in some manner to effect maybe one player, and not all, in an effort to impact the price of gas.  Hmmm, I’m not sold, but I want to hear more.

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.

I suggest that we not buy from EXXON/MOBIL UNTIL THEY LOWER THEIR PRICES TO THE $2.00 RANGE AND KEEP THEM DOWN. THIS CAN REALLY WORK. 

So, this is where the plan completely falls apart.  On the surface, this plan feels like it should work, right?  Unfortunately, a study in basic economics will prove that not only will this plan not work, but due to unintended consequences, the exact opposite could occur.

The first problem is that this plan doesn’t actually have a net impact on demand in the marketplace.  By not buying from Exxon/Mobil, they will certainly see demand for their product go down, but the demand will go elsewhere.  Logic would dictate that Exxon/Mobil would have to lower their prices, right?  Wrong.  The issue now becomes that gas, which is a limited resource, will now have it’s net market supply impacted by having Exxon/Mobil removed from the marketplace.  As such, the increased demand to the other stations, for their now more scarce supply, would cause their prices to go up.  Assuming that there are rational buyers in the market, the pricing at Exxon/Mobil, without any changes, would now appear to be cheap, and the demand would flow back to them.

Now, assuming the demand could permanently be removed from Exxon/Mobil, their supply is completely out of the market and the price of gas would have to go up.  You see, Exxon/Mobil can’t simply lower their prices to what the “market” defines as fair.  The current price is what the “market” defines as fair.  If we are to assume that a lower price, say $2.00, is OK to allow people to return to buying from Exxon/Mobil, they will see a run on their stations, which will cause their supply to disappear, again causing the supply demand imbalance with the other stations.  Exxon/Mobil will have to raise their prices.

Rationality in the marketplace is all fine and good, but there is another dynamic which further complicates this issue.  Exxon/Mobil, as refiners and marketers of gasoline, sell their gas from their terminals to the highest bidder.  Sure, they sell gas to stations which they have branded (some owned by them, many are not), but they are happy to sell that gas to a distributor or jobber at a higher price if the market will allow.  The station owners really only make a penny or two on gas, so the people getting hurt by this plan are the station owners, who are not Exxon/Mobil employees.  This narrow margin on gas is why the pumps at the stations are so slow.  Those mini-marts make far more in terms of profit for the station owner than the gas.

To sum up, supply/demand is really simple.  For a given supply, there is demand, and that determines price.  Without removing demand, but actually removing supply, the price will go up for the resource, not down. 

  • max191

    I was just going to relax and read this morning then in the meantime I got your blog to read. Really good one.
    regards
    charcoal grill