Can consumers force gas prices lower?

I was forwarded the following e-mail suggestion for reducing gas prices.  Before I give you my opinion--later this week--I want to know what you think.

By now you're probably 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.

[...I deleted a bunch of stuff on how to reach 30 million people through an e-mail chain]

I suggest that we not buy from EXXON/MOBIL UNTIL THEY LOWER THEIR PRICES TO THE $1.30 RANGE AND KEEP THEM DOWN. THIS CAN REALLY WORK.

What do you think?  Will it work?

REVISION:  I want to know if you think it will work IF everyone does as the e-mail suggests.  It's no fun to just say "No one will do it.'

Comments

[odograph]

That amusing, for its half-awareness of market factors.

[Student]

I think it depends on how we model the gasoline market. If the big firms are colluding, his idea might work. But, if we model the gasoline market as monopolistically competitve, then then the price might actually go up.

Collusion: If there are only a few suppliers of gasoline and they are colluding perfectly to keep the price of gasoline above the opportunity cost of producing it, then this might be a way to break the collusion and force prices down.

Monopolitistic Competition: But if instead we assume the market is monopolistically competitve (differentiated products with free entry), then the e-mailer's idea might have the opposite effect.

As a result of competition between the entrant firms, economic profits will have already been worn away to zero before the scheme starts. Thus, shifting your gas-shoping to Exxon's competitors will not allow exxon to lower its prices, it might instead force them out of business.

In the mean time, the demand curve facing Exxon's competitors shifts out and upward, bidding up the price of their gasoline.

Eventually, new entrants (or the threat of new entrants) will compete prices back down to where they were to start with.

[Dano]

Some form of this e-mail comes around every year just before the jack-gas-prices-up season.

Will a form of the same e-mail suddenly compel millions into action?

Gosh...let me think...hmmm...lessee...

D

[Tim Haab]

Just to be clear...my question is IF everyone did as said in the e-mail, would it work to lower gas prices. That's separate from the question of 'will people do it?'

[the Other michael]

>economic profits will have already been worn away to zero before the scheme starts.

Except that we know that isn't true for the past year, correct?

[joshua corning]

son't all the smaller gas companies buy thier gas from exxon and mobil?

and isn't most oil refined in a small number of refinaries.

I think the gas/oil supply has to many bottle necks for such a scheme to work.

[Student]

Personally, I don't know if oil companies are earning economic profits or not. Just because oil companies are making huge accounting profits doesn't mean they are making huge (or any) economic profits.

Of course, if oil companies are earning economic profits and we are "in between" equilibrium points, then I suppose this scheme might actually speed our arrival to our new equilbrium.

But is the equilibrium price for unleaded gas $1.30 per gallon? I don't know, but I doubt it.

1. If they reduce their prices, the other companies will have to follow suit.

Assuming everyone is still heeding the 'wise' email - no. If nobody is buying gas even after Exxon/Mobil lowers their prices, why bother competing with them?

2. I suggest that we not buy from EXXON/MOBIL UNTIL THEY LOWER THEIR PRICES TO THE $1.30 RANGE AND KEEP THEM DOWN.

They're suggesting that letting demand adjust back to its original level won't pump the price back up to where it was. I don't think so. They're pricing optimally now - why would they change?

There are more reasons.

[yankee]

I issued your challenge at The Oil Drum too, so you may want to check over there for more opinions.

[Tim Haab]

Thanks Yankee.

[Mark Arroyo]

I think it's a great idea except there is a fatal flaw in their plan. Regardless of where you buy your gas, it's highly likely that one of these companies is still going to make money regardless of where you buy your gas. I think one needs to keep in mind that gas stations only sell the finished product produced by the refineries. And it's the refineries that are making most of the money, not the gas stations. Although, the gas station owners that have thier markup for their operation expenses and their profit. But it's the refineries that are making the big bucks. And who owns the refineries. Exxon/Mobil is probably in there somewhere (probably somewhere at the top. Boycotting mobil gas stations might effect some local gas vendors in the short run. But in the long run, I doubt Mobil is going to be hurting from a boycott.

Bottomline is the oil companies have us by the short and curlies!

[the Other michael]

Riding a wave of high prices for oil, gasoline and natural gas, Exxon reported third-quarter net income of $9.92 billion, up 75 percent from the year-ago period, on revenue of $100.72 billion. It was among the biggest quarterly profits of any company in history, and amounted to a per-minute profit of $74,879.23 during the quarter. A handful of other companies have posted higher quarterly earnings in the past, but only with the help of big accounting adjustments, while Exxon's results came mostly from operations.

[jimbo]

Depends on how much their revenue stream depends on retail sales of gasoline; but let's assume that 100% of their revenue come from retail gasoline. All of a sudden they have no revenue. Somehow, management finds out that the boycott will end if they lower prices to $1.30/gallon. They foolishly lower prices to $1.30, and suddenly everyone is buying their gasoline and the other guys are selling zero gasoline. Moreover, people would be topping off their tanks and filling every lawnmower, weed-wacker, snowmobile, atv, motorcycle, boat, and leaf blower in the garage. Long lines would form. Exxon and Mobile would quickly exhaust their stocks of product, and probably would have to buy some from the other guys or turn away customers. Does anyone think that the other companies are going to sell their surplus stocks to Exxon and Mobile at $1.30 or less? Does anyone think that OPEC is going to slash crude prices to meet Exxon and Mobile's demand? Does anyone want to buy a bridge in Brooklyn?

[David Jeffery]

Heh, I think Jimbo's summed it up well!

[joshua corning]

I would like to change my answer to "jimbo is right"

[malcolm]

The companies that you buy gas from will
raise their prices due to the increased demand. The companies that are boycottd from will have no incentive to lower their prices since they won't attract new customers since they are being boycotted!
They will lose to every customer they sell to at the low price instead of at the high price. There's a case to be made that it is in their best interest to raise their price to the new higher market price. Instead of driving prices down, the "boycot"
will drive gas prices up! Surely an unintended consequence...

This idea is ignorant. Since in recent years U.S. refineries continually run at ~95% of capacity, buying gas at another station only means someone buys gas from ExxonMobil on the commodity market. (Note: refining units are always being shut down for maintenance, thus 100% of capacity is impossible). ExxonMobil won't care where it makes its profit...at the pump or on the commodity market, but due to market constraints ExxonMobil will sell its gasoline or prices will exceed $3/gallon (probably more). To prove this point, let us look at recent events. During Hurricane Katrina, ~10% of refining capacity was damaged or shutdown for safety. The effect was $3+/gal gas. So since ExxonMobil holds 10+% of the refining capacity, it is reasonable to assume the removal of this supply would result in $3+/gal. This result is be quite opposite of the intended result. However, this is all hypothetical. In reality, ExxonMobil would temporarily sell its gas on the commodity/spot market. Prices might increase by a couple pennies due to added middle men.

On a side note, I have worked at two ExxonMobil refineries and I was told the majority of regular unleaded gas at their stations isn't refined at ExxonMobil refineries because ExxonMobil primarily produces premium grade gas. They buy regular unleaded from other companies and add the their additive package to it (this constitutes less than 1% by volume). So boycotting ExxonMobil stations doesn't necessarily mean you boycott products from an ExxonMobil refinery. Instead, you waste time and gas driving to a different station.

[Student]

Can someone please post a source for where they get their info on how the gasoline industry is organized?

Does BP and Shell actually buy its gas from Exxon? I assumed each "brand" controled their entire production process.

[odograph]

I was flipping channels last night and was surprised to hear Bill O'Reilly say he wasn't going to buy from Exxon anymore. His argument wasn't too dys-economic. He just said he didn't like them. I think it's true that no one has to buy when they just "don't want to."

Oh, he did ask a few times why Exxon didn't develop "ethanol like Brazil." (A side note on that, I talked to a chemical engineer doing biofuels over Easter, and asked her for here thumbnail on ethanol: "thermodynamically challenged."

[Brandon O.]

If this plan did work, it would not last very long. If exxon lowered their prices, people would go to them just because they were cheaper. Therefore, the gas would basically stay the same, but hey I'll give it a shot.

[DMaedke]

Maybe the solution really is biofuel? This company offers workshops on how to safely make your own ...

http://www.vegenergy.com/

[Christine]

History has proven that boycotts don't work. I remember when the Southern Baptist Convention called for a boycott against Disney because of their policies concerning homosexuals. I can't recall any boycott EVER that has made a significant impact. What I want to know is, what WOULD drive down gas prices? We have not yet begun to feel the impact from the rate increase. How much longer do you think it will be before truck drivers can no longer afford to put fuel in their trucks? Almost every product on the market is moved by truck. We will see the price of goods go through the roof. One possible solution is to reduce the tax on fuel. The current tax rate in Texas for gasoline is 20 cents per gallon (I think). At this point, I'll take every discount I can get!

[Dano]

I can't recall any boycott EVER that has made a significant impact.

I lived in Dallas when the Southin' Babdists boycotted The Last Temptation of Christ. Their pressure eventually got all theaters but one to not show the movie. The one theater, however, had only paid parking and the weeks-long sold-out showing not only paid for parking, but the protestors paid the theater for parking for the privelege of picketing the show...

I'd say that worked like a charm (in my view, anyways).

:o)

D

Well it would drive them crazy and scramble for an alternate method of screwing with the consumer let's try.

[Jack]

The world is full of GREED and that is what it boils down to know other answer and it happens thoughout histroy. But something is going to have to be done though because the gas prices will force people to go under.....