Fighting Back Against High Gas Prices

Boycott Exxon/Mobile I received a chain email last night from a friend who’s a very smart guy (a music professor at a prestigious local university) and frustrated, like most of us, with the high cost of gasoline. Here’s the plan for fighting back:

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 IT 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.

[…]

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.

No, it can’t.

If people followed suit, Exxon/Mobil might go out of business, although I suspect they’re sufficiently diversified to handle a loss of U.S. gasoline sales. But companies can’t sell products very long at a cost below what it costs them to bring them to market. And, no, they can’t make it up with volume.

Further, boycotting one supplier would actually push up gas prices!

Gas is a commodity. Commodity markets work on the principle of supply and demand. When supply is higher than demand, sellers lower the price until the two factors equalize again. When demand is higher than supply, sellers raise the price to curb use and stretch supplies until, once again, the two factors equalize.

Just for the sake of argument, let’s say we successfully organize the ExxonMobil boycott. ExxonMobil loses business and lowers prices to lure you back. The other stations will follow suit and lower prices to compete, right? Not quite.

To avoid ExxonMobil you go to the Speedway across the street, instead. Speedway’s business increases, causing them to raise their prices to try to control demand, otherwise their supply would be quickly depleted. Their higher prices drive customers to Shell, who in turn raise their prices and drive customers to BP, and so on. Eventually, supply and demand will equalize and all stations will have the same price again.

As consumers, we can do little to control supply, but we can control demand. However, effectively doing so means reducing demand overall, not just at one station. The reduction in demand must be severe and long-lasting. If you want to save money at the pump, slow down on the freeway, plan outings to get everything in one trip, walk more and trade in that gas-guzzling SUV for an economical compact car for starters.

A quick Google search reveals this scheme has been around since at least 2000. But it continues to seem plausible to plenty of people, including perfectly bright people who pay attention to world events. Clearly, people just don’t understand how prices are set and they’re outraged that they’re struggling to pay more for gas while the fat cats at the oil companies keep getting richer.

Why Are Gas Prices So High? So, why are gas prices so high? The federal Energy Information Administration puts it succinctly:

The cost of crude oil now accounts for almost 70% of the gasoline pump price. World crude oil prices are at record highs due mainly to high worldwide oil demand relative to supply. Other factors contributing to higher prices include political events and conflicts in some major oil producing regions, as well as other factors such as the declining value of the U.S. dollar (the currency at which crude oil is traded globally).

So, the cost of crude oil — the chief component of gasoline — is going up and the value of the dollar is going down. Meanwhile, the booming economies in China and India mean that another couple of billion people are competing to buy crude oil.

Gas
Are oil companies reaping record profits? Sure. They’re taking a small percentage of overall sales as profits, just like other businesses. As prices go up and demand remains constant, they’re getting a percentage of a much larger pie. But they’re not pocketing an extra dollar for each dollar increase in the price of gas; otherwise, a less greedy competitor would settle for a mere increase in 75 cents a gallon and get all the business.

For more background, see Steve Verdon’s essay from last year, “Price Gouging and Posturing Politicians.”

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Steve Plunk says:

    Stop filling or releasing oil from the strategic reserve could solve a couple problems.

    First, some analysts estimate government purchases to fill the reserve drive up crude prices 5-10%. Second, releasing some oil could cause a sudden price drop and drive speculators out of the market. Analysts say speculators add 20% to the cost of crude.

    The consensus is oil prices are a bubble waiting to pop but need a needle. The strategic reserve could be that needle and a release is justified under the law.

  2. James Joyner says:

    Based on our discussions with King Banian last night on OTB Radio, virtually no one who understands the subject thinks the Strategic Petroleum Reserve is a good idea. But it’s still a drop in the bucket in terms of the cost of a gallon of gas.

  3. floyd says:

    Only a very small percentage of the fuel produced at an XOM refinery goes to Exxon or Mobil stations
    Example…
    XOM owns a refinery in the Midwest which produces 250,000 bpd of fuels. This is all types of fuels,… Gasoline, home heating oil, diesel, kerosene, coke etc.
    The fuel produced in this refinery is from very low cost sour crude and shale oil, so they have comfortable margins.
    Most importantly,this refinery supplies fuel to the entire Midwest through the spot market and even their marketing department must compete to purchase it for retail.[sort of]
    Nearly every station in the area will still be selling XOM produced fuel, regardless of the name on the pump, and at a decent margin.
    The most you could hope for is to hurt the retailer and moderately impact marketing. I happen to know that XOM is not keen on retail stations anyway and the company as a whole would not really miss their retail business much.

  4. Triumph says:

    The consensus is oil prices are a bubble waiting to pop but need a needle. The strategic reserve could be that needle and a release is justified under the law.

    I’m not sure how you’re coming to the conclusion that a “consensus” exists that explains rising oil prices as a result of speculation.

    While it is true that wholesale prices are related to fluctuations on the futures market, the long-term reason for high prices is probably more a function of increasing demand. In fact the World Bank just issued a report linking high fuel prices to increased demand.

    On the petrol side, there are short supplies of alkylate as well. In recent months there have been some supply disruptions in Mexico as well as Nigeria. Last week the US Dept. of Energy reported that crude inventories fell by 2.3 million barrels last week–an immediate measure of supply.

  5. Jeffrey W. Baker says:

    A good way to “fight back” against high oil prices is to stop driving so much. This happens to be the same tactic I use to “fight back” against high cocaine prices.

    People could realize a large savings by bicycling. Also, it’s good for you. Bicyclists live longer, healthier, happier lives, and they do it on the cheap. Try it!

  6. yetanotherjohn says:

    This made me think about what you could do about lowering prices (other than the obvious of a some magical alternative energy source that you could economically and widely put out). The answer (and I am not arguing for this) would be a war with China. ‘Bomb them back to the stone age’ would lower their demand. Supply stays the same and demand goes down means prices will fall.

    Of course, there would be some other unintended consequences to this.

  7. glasnost says:

    This logic seems flawed.

    To avoid ExxonMobil you go to the Speedway across the street, instead. Speedway’s business increases, causing them to raise their prices to try to control demand, otherwise their supply would be quickly depleted.

    Increasing prices to control demand is one possible response, yes. Another possible response is to buy all the extra gas the Exxon & Mobil have lying around in storage, because no one’s buying their gas, and, you know, go ahead and satisfy that extra demand.

    They probably wouldn’t buy it from Exxon. But Exxon would cut back on their purchases in response to their slumping demand – because that distribution costs money. That extra distribution would be bought from suppliers by Speedway.

    I don’t understand at all how you arrive at the conclusion that Speedway would need to “control” demand. They’d be getting the exact same amount of demand that Exxon would be losing. They could supply it with the same amount of gas Exxon is not able to sell. The only question at all is transactional friction.

    You seem like a smart guy, so perhaps there’s something here I’m not getting. I invite you to explain.

    Meanwhile – The cost of crude oil now accounts for almost 70% of the gasoline pump price.

    So what? We have no context to judge whether that’s a large or a small amount. Why shouldn’t it account for 90%?? That leaves an awfully large amount of percent for profits.

    Yes, the price increases at the pump are mostly because of crude oil prices. But I’ll tell you what – oil companies’ profit margins should be **declining** as they try to compete on price in an *atmosphere of rising prices*.

    But they’re not. That’s because they collude to keep higher margins than market pressure would dictate.

    Gas is a commodity. Margins should be in the commodity zone – like, 1 or 2 percent. But they’re not. They’re higher by a factor of five. That’s due to the lack of competition.

    This guy’s suggestion is a great idea.

  8. Steve Plunk says:

    Reason magazine has article about oil prices http://www.reason.com/news/show/125414.html. Speculation is a significant component. It also touches on recent declines in demand.

    A single supertanker can carry 3 million barrels of oil. A drop of 2.3 million barrels could be considered insignificant or just a natural variation in deliveries.

    The reserve was established to protect the economy. I think we have a problem and it needs to be addressed.

  9. M1EK says:

    The consensus is oil prices are a bubble waiting to pop but need a needle.

    Count me another skeptic. Steve, nothing remotely like this consensus exists – there’s ten guys who think we are seeing Peak Oil for every one who thinks this is purely speculation.

  10. Bithead says:

    As you suggest, James the idea has been around since we bacame bloggers, you and I.

    But there’s more to this story, that most folks don’t understand, and it’s something I touched on elsewhere, yesterday, in quotiong an Article at crossing WallStreet.com:

    Although U.S. crude oil inventories have fallen, gasoline inventories are at their highest since March, 1993, notes Tim Evans, an energy futures analyst at Citigroup’s Futures Perspective. World oil production was up 2.5 percent in the first quarter of 2008 over the same period in 2007 while world oil consumption rose by just 2 percent. In fact, world production is projected to be 3.3 percent higher in the second quarter and 4.1 percent higher in the third quarter than the same periods a year ago. On the other hand, world demand is projected to rise by just 1.6 percent over the next six months.
    In fact, demand is falling in some countries. According to economist John Kemp at the commodities firm Sempra Metals, the U.S. consumed 4 percent less petroleum in January 2008 than it did the year before. Evans agrees, noting that the U.S. demand for petroleum products began falling off last July. Interestingly, this drop in U.S. oil consumption began before crude prices turned vertical and before we began to see weakness in the broader economy. Even China’s thirst for oil is abating somewhat. Its demand for oil, which once rose at 10 percent per year, has now dropped to 6 percent per year. In addition, world surplus oil production capacity has gone from a very tight 1.5 million barrels per day a couple of years ago to more than 3 million barrels today, says petroleum economist Michael Lynch

    Here’s the thing; The plan suggested in the reoccurring spam might actully have a short term effect, was this high price business actually responding to the laws of supply and demand. It’s not. In fact, the prices started going up BEFORE consumption dropped. More, we actually have more supply than we’ve had in years, and still the prices remain strong.

    The indications are that this is all speculation investments.

    Oh… and just a though in passing… wasn’t that how Soros said he’d attack Bush, by manipulation of the price of oil?

  11. Hope Muntz says:

    The commenter who suggested bombing China was getting warm. Instead, just boycott all Chinese products. I do. I check every purchase I make for point of origin, including vitamins, shoes, food, clothes, etc–and if it’s Chinese, I pass it up. If it’s assembled in Mexico from Chinese parts I pass it up. Just as this summer I will not watch a minute of the Neo-Nazi Chinese Olympics, which I consider just another commercial product of a racist, fascistic regime that seems intent on poisoning the West through shoddy factory oversight (if it isn’t actually deliberate). I don’t count anything made entirely in Taiwan, BTW, though I do extend this to Hong Kong and Macao. Just read the label!!! It’s surprisingly easy to find alternatives.

  12. Steve Plunk says:

    M1EK,

    I would agree this is not purely speculation but speculation is playing a huge part in the recent run up to $115 a barrel. Based on world supply, world demand, and present inventories that is an irrational level. Of course it’s not irrational to those making money from it while we all lose money.

    Fighting back through the market and government is our counter. This is not asking for government intervention per se. The government already distorts the market a great deal by limiting exploration and development and heavy regulation. Large purchases for the strategic reserve also distort the market.

    Peak oil has yet to be proven world wide. It may be true but to date it is without solid evidence.

    Why not release 30-40 million barrels and judge the effect?

  13. Jeffrey W. Baker says:

    That’s only about 1 day’s worth of USA oil consumption.

  14. Michael says:

    Here’s the thing; The plan suggested in the reoccurring spam might actully have a short term effect, was this high price business actually responding to the laws of supply and demand. It’s not. In fact, the prices started going up BEFORE consumption dropped. More, we actually have more supply than we’ve had in years, and still the prices remain strong.

    How long does it take for oil to get from the ground to the pump? There’s always a lag between suppy/demand and prices, so is it possible all we’re seeing here is that the price of oil is responding slowly to the change in supply/demand?

    The fact that the prices went up before demand went down may indicate that the price was reacting to the previously high demand, not that the drop in demand was reacting to the increase in price.

    There may be a “bubble” of sorts here, especially with speculators, just like with the mortgage market. People assumed that the demand for oil would only go up, so they speculated on higher oil prices. If that is true, then we’re likely to see that extra supply start scaring speculators, and work to decrease the price. I’m not sure what the strategic petroleum reserve would do here, other than provide an eye-opener to the current supply increase.

  15. Beldar says:

    Excellent post, spot on, Dr. Joyner.

  16. John Burgess says:

    Michael asks: ‘How long does it take for oil to get from the ground to the pump?’

    The answer depends on where it’s coming from and where it’s going.

    Oil from the Arab Gulf takes about six weeks in transit to either US refineries or Japanese/Chinese ones.

    You also need to factor in what sort of lag that oil will meet at the refinery, what sort of lag the refinery will meed in getting product into the pipeline, how long it takes distributors to get the finished product (gas + additives) to the gas station.

    If the oil’s coming from Mexico or Canada (the two largest suppliers to the US), figure a couple of weeks from well-head to refinery (pipelines are usually faster than super-tankers), then add all the other factors.

    I, too, believe that speculation is responsible for a good chunk of current gasoline prices. Hedging bets (but always with an upward trend) is the safest strategy for dealing with the unknowns that could happen during the period between pumping the oil and getting it to the gas pump.

  17. John Burgess says:

    Michael asks: ‘How long does it take for oil to get from the ground to the pump?’

    The answer depends on where it’s coming from and where it’s going.

    Oil from the Arab Gulf takes about six weeks in transit to either US refineries or Japanese/Chinese ones.

    You also need to factor in what sort of lag that oil will meet at the refinery, what sort of lag the refinery will meet in getting product into the pipeline, how long it takes distributors to get the finished product (gas + additives) to the gas station.

    If the oil’s coming from Mexico or Canada (the two largest suppliers to the US), figure a couple of weeks from well-head to refinery (pipelines are usually faster than super-tankers), then add all the other factors.

    I, too, believe that speculation is responsible for a good chunk of current gasoline prices. Hedging bets (but always with an upward trend) is the safest strategy for dealing with the unknowns that could happen during the period between pumping the oil and getting it to the gas pump.

  18. sam says:

    Maybe the Canadians can save our bacon, eh?

  19. Bithead says:

    Yeah, but then we’d have to call it Canadian bacon, Eh?.

  20. sam says:

    Sigh, that was the joke, Bit.

  21. JKB says:

    Forgotten is that most states or jurisdictions have laws prohibiting the sale of petroleum products below cost. So Exxon/Mobil can’t reduce the price below the actual current market cost even if they wanted to.

    Also, petroleum is shipped by pipeline. All the gasoline, let’s say, is the same until it reaches the local fuel dealer. It is at that location, that the special additives particular to the brand are added. All that would happen is that less Exxon/Mobil brand additives will be mixed and more additives for the stations to whom the sales have migrated will be used.

    Only way to lower the price of a commodity is for their to be a total market drop in demand.

  22. Bithead says:

    Yeah, but then we’d have to call it Canadian bacon, Eh?.

    I know, but you didn’t say “Eh?”

    (Sigh) Rookies….

  23. Kevin says:

    i agree with alot of aspects of this blog but like jeff said we use about 30-40 million barrels in one day…thats ALOT of fuel…why not just have one or more days every month or every couple months where your mileage is limited , or ever one full day when no one is aloud to drive, wouldn’t that greatly decrease our consumption in gasoline, and then wouldn’t that lower the price of fuel…? i have this as an idea its tough to explain right now tho i am pretty tired…

  24. Kevin says:

    Just like they did in the great depression, they started rationing out days where people could go and get gas because the supply was low and they couldnt keep up wit the demand…they didnt raise the prices so high no one could afford them, they do that now and as a community were ALL forced to drive, weither it is to school or work, places we have to be, we cant call work and say we cant come in because we have no gas… or even money for gas, history repeats itself, that history is repeating, we cant supply the demand, so why dont we do what somewhat saved us last time, even if we issued the rationing state wide, like one day gas would not distributed…thats just a thought.

  25. Bithead says:

    like jeff said we use about 30-40 million barrels in one day…thats ALOT of fuel..

    .

    Not for 303,878,352 people, it’s not.
    Well, actually, it’s more now. Updates are available here.

  26. JKB says:

    “wouldn’t that greatly decrease our consumption in gasoline, and then wouldn’t that lower the price of fuel”

    It is not our (US) consumption that only matters. It is worldwide consumption. Part of the rising fuel prices is caused by increased usage due to the industrialization of China and India. The only way a US reduction of demand would lower prices is if the rest of the world doesn’t take up the supply our reduction creates. But lower prices would lead to increased usage since more uses would become profitable.

    This is the same reason that when Chavez threatens to stop selling oil to the US no one worries. The only way he can impact prices or supply in the US is by reducing Venezuela’s petroleum output to the world market, which means he has to forego the revenue that output would produce.

    As far as rationing, you need to calculate the reduction in the GDP from decreased economic activity. A nice way to prolong the recession?

  27. Bithead says:

    Again, guys…

    Consumption is down already.
    Indeed, it was down before this price spike started happening.

    Explain to me how your plan works when the laws of supply and demand clearly are not in force.

  28. mike says:

    Everyone seems to have an answer, but I for one have been boycotting Exxon Mobile for almost 2 years now. Ever since they posted their quarterly profits, I feel as though they don’t need my money and their not going to get it.Everyone should boycott them for the simple reason is that their oil comes from Saudi Arabia, Irag or Iran, and so what if they go out of business, with the billions they have bilked from us I don’t really care!! It’s time to start reacting or it will continue to go up. We the American people need to take a stand because our leaders certainly aren’t helping us. You know; the people we elected to ruin our country or is that, run our country.