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Gas prices and rollercoaster’s                                                                                     Print this essay

Posted at: Apr/28/2011 : Posted by: mel

Related Category: Economics,

Have you heard the rumor, apparently the price of gas as finally “plateaued.” I really hate hearing that because it gets my expectations up, then I just get disappointed. I have hiked and explored a lot of the southwest and know what a plateau looks like. Most plateaus are pretty symmetrical so I would hope for prices to fall as fast as they climb, but it never seems to works that way. Ultimately my frustration is that the price I pay at the pump never seems to track the price of crude oil that is always being reported in the new.

Have you ever been on a rollercoaster? The machine slowly and with a clattering noise drags the little train of cars up to the top of the first hill, pushes you over the top, then gravity takes over as you scream you way down the far side. Gasoline prices seem to do the exact opposite of the rollercoaster. When the cost of crude oil goes up, the cost of gasoline at the pump seems to go up just as fast. When the price of oil all of a sudden falls, the price I pay for gasoline seems to only inch its way down at a snail’s pace in exactly the opposite cycle to that first hill on the rollercoaster.

In a perfect free market, retail prices should aggressively track wholesale prices and any product, whether cars, oil, lumber, computer chips or ball point pens should be able to float up or down with equal speed. Unfortunately; in our markets, what goes up does not seem to come down, at least not all at once. Does this mean our free markets are not really all that “free?”

I have heard all kinds of theories for why gasoline prices drop so slowly. Some say it is greed by the speculators, some say a conspiracy by Arab oil Sheiks. I have heard it described as collusion between big oil and government. Some say it is price gouging by the station owners on a national scale. At first glance, all of these are comfortable because they assign blame to someone we don’t know who is apparently out to take advantage of us. The problem with all these notions is that they require a great many people to keep a secret a very big secret for a long time. In our modern information age, no one has been actually able to keep a secret for decades, honestly…secrets are nearly obsolete. I know, it sounds cynical but I just don’t believe you can really maintain a large scale secret for any length of time anymore. Without secrets, there is really no way to pull off the collusion and price manipulation that would be needed to control gas prices on this kind of scale.

We've been told for months that unrest and instability in the Middle East spooked the traders who set oil and gas prices. These traders had concerns over reliability of future supplies, especially from state run production systems. Prices at the pump are nearly $1 per gallon more than this same time last year. But if crude prices fell, it is doubtful that retails prices would drop at a similar rate. The more I started to look at this, the more I realized this phenomenon is not unique to oil, it is also common in food, cars, and virtually anything that is sold directly to the consumer. I don’t want to be the one who throws the fundamentals of economic theory out with yesterday’s trash, so there must be something we are simply not accounting for.

I have begun to wonder if consumers themselves might not be to blame for this fast rise/slow fall price cycle, or at least responsible for half of the cycle. Let’s return to some simple economics for a moment. Prices generally go up because either demand is high for a limited supply or the demand is high for what is feared will be a limited supply. Basic economic theory also says that prices go down because demand is lower than the current level of supply. In the simplest perspective, the suppliers control the price when demand is high and consumers should control the price with the supply is high. I still believe this is true, but consumer exhaustion and frustration are new factors. Think about your own behavior for a moment. After gas prices have been painfully high for a while, the first time you see the price drop, you rush to the line with a feeling of satisfaction at saving 3 cents a gallon without necessarily shopping to see if you could do better still down the street. It does not matter that another gas station two blocks away is 2 cents less because you are so happy at your 3 cent a gallon savings satisfaction, you all but wallow in it. Our sheer exhaustion at dealing with burdensome prices has made us jump at the first break we see without ensuring it is the best one we could get.

This is compounded by the nature of the retail market. Thirty years ago it was common to see 3 and 4 gas stations at a single intersection and this proximity created price wars. Because it was easy for consumers to compare, if one station lowered their price by 3 cents a gallon, the other 2-3 would lower theirs by 4-5 cents a gallon. In that same era, most gas stations were either independently owned or independently owned franchises. The station owner or franchise holder could look out the window and see the line at their competitors business and knew they had to lower prices right away to get their customers back to their pumps. Now most gas stations are owned in groups of 10 or more if they are not corporate stores. The person responsible for setting the price is very disconnected from the events happen at one independent location.

This phenomenon is also easy to see with grocery stores. There was a time, not that long ago when stores were locally owned and managed. The local own was out early every morning painting special prices on their windows to entice you in and away from the competition. Now most grocery set their prices from a regional management center. When a consumer notices that the advertised price for watermelons has dropped by 2 cents a pound, they don’t look to see if the next store is less, they rush in to make the purchase with a sense of satisfaction at having saved money over last week’s price.

Economist with their confusing dialects and specialized vocabulary tend to discount the consumer in most of their theories. As published, free markets are driven by much higher forces, psychological influences from the consumer are often discounted or ignored entirely by virtue of their intangible nature and difficulty in being measured. If I am right, it means we follow price shock with price-numbness. After we become numb enough, we are willing to jump at just about anything that appears to be a relief from the highest price we have most recently seen regardless of whether it is now the best price. The move of most business away from local control has also removed their ability to be responsive in a timely manner to what consumers are yearning for.

Obviously, what this means is that while economist believe that consumers should be able to apply the pressure to force downward prices when supply side pressures ease, for many products this is no longer true. On the good side, this means that while retailers make very little if any profit while prices are going up, there is more profit to be made during that period when prices are more slowly dropping than one might expect. Short term profits are not a bad thing because the money will trickle through the enconomy eventually.

If I am right, ultimately a significant portion of the burden for helping force prices down falls on the consumer. In retrospect, I am as guilty as the next person here. When prices are rapidly rising I shop around to try and save a little. When prices to start to drop, I am so satisfied to save a little over what I paid last week that I really am not looking that hard for the best value.

There is get a good deal, and there is getting a better deal. Once we find the better deal we need to be telling all our friends. In a “free market”, consumers still have some control, but out of sheer exhaustion we may not be trying hard enough. The price should come down eventually, how fast it comes down may be more in our hands than we are willing to admit or accept responsibility for. Of course I could be mistaken. Maybe there is a direct phone line between the president of Exxon/Mobile and the ruling oil Sheiks of Bahrain and Saudi Arabia?

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Thomas Carlyle
It is the first of all problems for a man to find out what kind of work he is to do in this universe.
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