Can consumers force gas prices lower? The Answer

On Monday, I challenged you to decide if a boycott of Exxon/Mobil will reduce gas prices as suggested by an e-mail chain letter.  A lot of good answers and comments came in, both here and over at the Oil Drum, where they cross-posted the challenge to get a peak-oiler view on the question. Now I will give you my take.  First I'll give you the simple supply and demand answer then I'll get a little more realistic and talk about some of the real-world issues.

Will a boycott of all Exxon/Mobil gas stations force Exxon/Mobil to reduce their gas price?  The simple answer is: No.  What happens at all the other stations?  For the sake of argument let's suppose that Exxon/Mobil has a 25% market share--I have no idea what the real number is, but it doesn't matter for this argument.  Assuming EVERYONE boycotts EM, that means demand at other stations increases by 25%.  When demand increases, prices rise.  So the effect of the boycott is to increase prices at all other gas stations...OOPS. 

On the bright side--for Exxon that is--the boycott makes Exxon/Mobil gas look cheaper by comparison. 

Alright, now for some added reality.  What will Exxon's reaction be to the boycott?  At first you might think that Exxon will panic and start dropping the price.  Maybe, but they really wouldn't have to drop the price much because as soon at the price starts to fall, some greedy SUV driving, McMansion owning, anti-environmental exurbanites-hey, I resemble that remark--will use his unnecessary four wheel drive to run over the picketers and get the $.05 cheaper gas at Exxon.  Wait, I forgot, I'm assuming EVERYONE will uphold the boycott so Exxon has to be hurt right?

Nope.  Turns out that gas is surprisingly fungible.  That is, gas is gas.  Whether it comes from Exxon or Shell or wherever, the basic product is the same.  So what will Exxon do?  When the boycott hits, Shell will be faced with a sudden 25% increase in the demand for their gas.  It takes a little while to get gas to the pumps, so the temporary shortage will cause Shell to raise their prices.  But how will Shell fill their new demand for gas?  Most refineries are already running at 90-95% of their capacity, so it's unlikely Shell can fill the shortage in-house.  So where can Shell get extra gas?  How about Exxon? 

That's right, gas suppliers buy and sell gas from each other.  So the shortage at Shell will be filled by the extra capacity Exxon now has.  The net effect?  Exxon still sells gas, but now at a higher price.  In the short-term the boycott has the net effect of raising gas prices and most likely increasing Exxon profits.  In the long-run, the net effect is a break down in the boycott and everything gets back to normal.

So to answer my original question:  Can consumers force gas prices lower?  Yes, but not through a boycott of one station.  The ONLY way consumers can drive down the price of gas is to buy less gas from ALL stations.  That's right...Drive down, drive less.  Hey, I like that. 

Now if each of you will e-mail this link to 10 friends, and each of them e-mail it to 10 friends, and so on, within 3 days, John and I will have 4 gazillion visitors and will have achieved our life-long goal we so wantonly seek:  FAME...I'm gonna live forever, I'm gonna learn how to fly...HIGH!

**There are a number of other issues I haven't addressed here, all of which make the boycott argument meaningless:  like the industry structure, price gouging, etc.  I just think that the basic supply and demand argument is plenty to debunk this Urban Myth.

Comments

[Fernando]

Cross posted at the oil drum.

mmmhhhhh

Here in Argentina we know a little about these things. One year ago, our president (yes, our president) urged the country to boycott Shell's products.

http://www.chasque.apc.org/ips_eng/notas/2005/03/10/19:21:44.html

"ARGENTINA: President Urges Boycott of Shell Products By Marcela Valente

BUENOS AIRES, Mar 10 (IPS) - In an unprecedented gesture, Argentine President Néstor Kirchner urged the public Thursday to boycott Royal Dutch/Shell's products, to protest what he described as an "unjustified" increase in the prices of petrol and diesel fuel.

"Argentines don't have to buy anything from Shell. Let's unite and not buy a single thing from them, not even a can of oil, so they realise that we will not put up with this kind of thing anymore," Kirchner said in response to Wednesday's 2.6 to 4.2 percent fuel price hikes by the Anglo-Dutch energy giant. "

And it WORKED very well. Shell LOWERED its prices. In fact, I still fill my tank at roughly the same price a year ago.

By the way, Argentina has been growing for three years in a row at 9%.

[Tim Haab]

Fernando,

I don't know anything about the Agentina gas market. How much market power does Shell have? Based on the clues you've given--seemingly arbitrary price increases and decreases, an ability to respond to demand shocks--I would assume a lot. So much so that they don't have to competitively price gas. A slightly different situation than that in the U.S.

[Wadard]

OK...think I got it...drive less. My doctor will like that.

On another note, the message we get from oil lobby groups and their prime ministerial mouthpiece (little Johnny Howard) is that reducing emissions will hurt economies. As an economist you might know of the study or theory that leads to this conclusion. Do you? Or are they blowing it out their emissions promoting arses?

[Josh]

do you understand that you are asking people to stop driving to work or to tak their kids to school this idea is not very well thought out

[Ben]

Obvioudly youd still drive to work and school, its the other things. Complete errands in one run rather than going out 4 times a day, carpool to work or setup a carpool with a neighborhood for driving kids to school, use public transportation if available (and bearable), etc.

[odograph]

I know a kind gramma who takes here grandson to school some weeks. Running across town in her Ford Expedition burns 1 gallon per day. Now, the poor dear grew up in a different world, and I wouldn't be too hard on her ... but I'd suggest that in not too many years grammas like that should be running those trips in a smaller car, and maybe burning 1/3 gallon per day on the kindness.

[Mark Sandlenon]

I've thought about this for literally 15 seconds.

With that disclaimer, consider the following:

Obviously, if people simply substitute non-Exxon for Exxon gas, the Q remains the same. It is safe to assume that S remains the same over the near-term, so P will be unchanged. Hence, if you want prices to fall, you need to reduce the Q (by using imperfect substitutes, or (heaven forfend) driving less (or in a more fuel efficient vehicle). In short, aggregate effects are obvious.

But what if those who decide to boycott are those for whom the current Exxon price is perilously close to their reservation price, whereas those who stay would be willing to pay more? Perhaps a boycott gives Exxon an opportunity to test this by mixing some kind of additional service in (cleaning windshields? Free coffee?) and actually RAISE prices. This scenario is more easily believed for other goods, such as beer sold in a bar, where one can more readily think of the "good" actually being a composite of the liquid itself and the "purchase experience", but hey...

[Dawn H]

I had this forwarded to me a few times....I'm no expert, but it seems to make some sense:

************

Important! must read!! Make gas 1.79 by summer

We've all seen the emails to not buy gas on a particular day, or to boycott Exxon and Mobile. But, these will not work, because your level of gas consumption will not change, thus causing no overall price shift in the market. But, there's a study being published this summer by two University of Chicago economists showing how if we buy more gas in May we'll have lower prices from June through Septemember, just in time for vacations.

It's based on what they call the "DVD example." In 1998, a DVD player cost about $500, and hardly any were sold. But, from 1999 to 2002 DVD sales went up 78% each year, causing prices to go down to the $35 level they are today. It's a simple economic theory - the more that is bought, the lower prices will go.

By contrast, the idea of boycotting a product in the hopes of reducing its price to the consumer is antiquated and been proven wrong. There are easy examples all around. For instance, the span from 1914 to 1919 in the US saw a rise in the cost of lobster due to many reasons. In protest, parts of the country boycotted lobster ENTIRELY - expressing that the boycott would end when lobster prices came back down. However, the smaller remaining group of lobster eaters had to pay more money to cover the costs of the lobster industry, and lobster prices have never returned to adjusted pre-1914 or even 1919 prices. As a result, lobster is now a delicacy that is enjoyed only by the super rich. Do we want gasoline to become a "luxury" item that working families can't afford?

By applying this to gas today, if everyone bought 25% more gas this May gas prices would fall from the $2.99 level they are now to $1.79 by June 30. Some ways you can do this include filling up any extra vehicles you have, buying some gas cans and filling them up, and even by driving more! But, to make this work everyone needs to do their part to increase our consumption by 25% this May. Please forward this to everyone you know, post on your MySpace account, anything to help spread the word so we can enjoy affordable vacations this summer!

[rich hutchins]

umm. mark.. no... buying more does not 'make prices go down'. i'd love to find out what bizness scholl taught you that one.. check your info. 1st - lobster. weren't prices "already rising" as you said - and, think about it. lobster has been & will continue to rise in price because it is getting harder & harder to find due to depleting them by overcatching.. now it is a delicacy? we eat much more now than 1919!!!! did prices fall no! so eating too much we have been depleting it!! are gas prices rising because we used too little? if increases in demand lowered prices than there would be no inflation. consumption is constantly increasing in the world. capitalism is based on the supple/demand curve. there are a few times where a larger market will give cost effeciancies- but mature markets like oil are not them... in fact, we are so close to using all oil that we can refine every day at current capacity that slight increases in demand raise prices- remember katrina? took out a few refineries so existing demand caused high prices. learn a little about economic theory before 'explaining' something next time

[frances]

With all these arugments at odds with each other, I think the message is that there's not a damned thing we can do about the gas prices except stop driving our personal vehicles. However, how much is my time worth? It'd take me 2 hours to get to work by local bus versus the 15 minutes it takes driving the freeway. I'll pay the $3.60 a gallon to keep three and a half hours to myself. It'll also save me three and a half hours of babysitting, which is considerably more than I'd pay at the pump.

[odograph]

15 minutes would put it in biking distance for me ... but i realize that not all locales are as safe as one-another.

[Bryan]

Well if more people were out biking through areas that are "unsafe" you'd beging to make the area safe...For example here at the University of Wisconsin-Milwaukee the surrounding neighborhood would be a dump and full of crime if it weren't for the school...the school itself isn't to thank, rather it's the 20,000 students that live in the area, making it a less than ideal place for crime. This is further backed up by the fact that during the summer when there are fewer students walking the streets and riding around the crime rates jump up significantly. SO ride your bike and don't look at yourself as better than anyone...

[Jesse S]

Why not buy from only one source? Say Arco (usually has the most competive prices). Buy as little gas as possible by managing our driving to be more efficient. Use some consumer restraint while we watch competeing stations lower prices until we all decide to move to another station and only buy form them until a reasonable price is achieved.

[Tony T]

All arguements are well said and have a lot of "hope". There are just a few things i would like to say. First of all, it is no one's fault if they drive a gas guzzling vehicle. My truck gets 10 miles to the gallon! No I cannot upgrade or use something else. That's just the way it is. I use it for work and personal. I cannot afford anything else. the truck is 22 years old, passes smog inspection every year and is paid off. Not looking to spend at least $40k on a new work truck. People should not be pressured into buying more fuel efficient cars.We cannot just stop buying fuel for one day or from one vendor. It will not work like a lobster boycott. We need fuel every day. Period. Sooner or later the Oil co's know we will buy.
I would be getting better mileage but the Ethanol that is being mixed into the fuel is lowering my mileage per gallon. It is actually costing me more in maintenance because i am changing spark plugs and fuel filters twice as often. My carb is needed to be cleaned every 3 months from the deposits. versus every year. Why is it that in a country like Brazil, Ethanol is 25 cents a gallon? They have pumps that only deliver Ethanol. I would not complain of maintenance and mileage if i was paying 25 cents. Here in the U.S., they are mixing Ethanol with regular fuel.To lower costs of fuel so they say. So we are paying more and more everyday for an inferior product. Only in the gas business is this accepted. No one would ever pay more for an inferior product anywhere else. Would you buy milk for $6 a gallon (along with all the advertisements bombarding you about vitamins and calcium) just to find out they are adding an additive to thin it out to lower prices and depenency and the by-product of that additive makes your liver fail? NO!
There is no reason that fuel prices are rising. If you look around the news media, you do not read about a refinery blowing up every day, or gas delivery trucks being stolen. Nope. they instill fear in the market by saying there is unrest in Nigeria, or the president of Iran is mad, or someone in the Saudi area was kidnapped. Always all this fear but oil is still being pumped. There is never a line at the pumps due to a shortage of fuel. Everyone knows how much oil is in reserve. Oil corporations are posting record profits. In the Billions!!! How much profit do they need? Of course the government will not do anything. They are raking in a ton of money from taxes. Around 30-40% of the cost per barrel of oil goes straight to taxes. Oil starts at $2 a barrel in Saudi Arabia, add $5-$10 to pump it. another $10 to refine and deliver it. roughly $30 per barrel is the cost. after that, CAPITALISM. Why does the price of gas always go up Thursday night? CAPITALISM. Why are there laws in place for gas stations to not compete with each other for the lowest price of fuel? CAPITALISM.
The president says we need alternatives. To not be dependent on fossil fuels. Really? Some effort the U.S. is putting in. Greenland already has Hydrogen powered cars on the road. India has Taxi cabs that run on compressed air. The U.S., well, we got these $65000 trucks that run on diesel which is a lower refined fuel than gas but costs more.
Here is what i propose. Stop buying oil from the Saudis and all those other nations over there, that way when something happens, it will not affect our prices. Also we can bring our troops back home. The amount of fuel being spent on all of our forces' vehicles, boats and planes must be huge! Yes that oil is the sweet crude, easy to pump and refine, very low cost. With all the record profits the oil companies post every quarter, they can spend a little more to pump the oil from our very own soil here in North and South America. There is a ton of oil off of our own coasts. Too bad states like Florida and California do not want to see any rigs on the horizon, like Texas, Louisiana and Alabama. That's fine, those states that are worried about rigs off their coasts can buy oil from somewhere else. Alaska needs to be pumped. Yes it's an environmental issue. Well, hopefully before we do any more damage to our only home there will be other alternatives. Brazil just found a huge oil field. Lets go and bring some cake and make friends. Venezuela has a ton of it too. Although Chavez is a bit of a nut, I'm sure something can be worked out. Canada has a ton of oil in the sand up there. Again, less profit more spending to pump and refine. Leave OPEC. That is the biggest legal mafia i have ever seen. Who are they to say how many barrels can be pumped? Screw them and their carrot on a string routine. We have enough oil in the ground and water to sustain our own needs. That is where we need to stop dependency, on the other oil producing nations across the Atlantic. This needs to happen now.
I will not be surprised when people start hearing about fuel trucks being stolen all the time, black markets for fuel in local towns, people just pumping fuel and driving off ALL THE TIME. Sooner or later there will be chaos. Do we as a nation have to go back to uncivilized times? take up arms against our government? I hope not! But this has to stop.