Note to readers: This article contains discussion about the relationship between supply, demand, and price. Check out my other article A cap on the price of gasoline is a bad idea – and the Nintendo Wii can tell us why for a review of the basics if you like.
With the rising cost of gasoline, many motorists are looking for relief. Recent price increase do not seem to correlate with any real visible changes around them – and frustration results. This frustration has turned into attempts at action for many, hoping for any way to reduce the amount of money spent on fuel.
There are many proposed solutions to the issue, however they tend to fall short. Let’s take a look at a few of them.
This is a popular one that comes around at the start of every driving season. The premise is that drivers stick together, and for (a day/3 days/a week) decide to say “screw you!” to the oil companies and not fill up at all. This will cause billions of dollars of losses, and force the oil companies to drop prices overnight.
Let’s address the first point, that this will cause the oil companies to lose billions. For simplicity, let’s assume there are two ways this could turn out:
- Everyone stays home during the strike, buys zero gas, and then resumes normal activities afterwards. (a “strong” strike)
- No one buys gas during the strike, but still goes about normal activities and has to buy gas later. (a “weak” strike)
We can agree that the premise of this strike is to reduce demand – which will cause the oil companies to respond. Let’s see how demand is affected by each of these scenarios.
In the first scenario, it’s like a few days of gas buying dropped off the earth. If we look at a graph of daily (blue bars) and average daily (red line) consumption, we can see that at the end of the gas strike, things are looking pretty good. Average demand has gone down! The companies have to respond!
Well, hold on a second. Time marches on, after all. Let’s take a look at this a few days later. Well damn, it looks like average demand is marching right back up again, since we really haven’t changed our habits for the long run, just for a few days. So demand is the same as it was before!
Now lets look at the second scenario a few days after the strike. Like before, at the end of the strike things look pretty good. But it gets even worse than before. Since we didn’t stay home and just kept driving, now we really, really need to fill up our tanks. So daily demand shoots through the roof as we play catch up, and our long term average demand spikes up (the exact opposite of what we wanted!) and then settles down to where it was before. Again, no change in the long run.
Well, you’re missing the point Geoff, some would say. The “weak” strike definitely wouldn’t work, but the “strong” strike still took out a few billion dollars for a few days, didn’t it?
Well yes, of course it did. Unfortunately, this is spread out over many companies – you’re a rounding error. If this loss continued for months and years, companies would start to feel the pain – but at this point, you’re no more aggravating than a large supply contract that was settled a few days later than expected. These companies are very good at not being bullied. Oil is a very cyclical industry, those companies than cannot weather a storm quickly fail.
Well fine! That won’t work, but let’s change our strategy. Instead of a gas strike, let’s pick a specific company (say Shell), and simply not purchase gasoline from them. Shell will watch it’s profits sink while the other companies make tons of money, say “screw this!” and reduce gas prices so they don’t go under.
At first this seems reasonable. The only problem arises when you ask yourself what the real change in supply and demand is. Supply hasn’t changed, the companies aren’t doing a damn thing. Demand hasn’t changed, we’ve just switched gas stations. Hrm, how is this going to work? But regardless, we aren’t buying from Shell! They’ll have to reduce prices, then the other companies will follow! Right?
Well, not quite. Let’s take a simplified look at the “flow” of gasoline between companies. The “futures market” (like a stock market that trades gasoline contracts instead of companies) prices gasoline, and matches sellers to companies that need gas. These companies then sell gas to you.
So let’s take away one of those arrows. Assume a perfect boycott, and not a soul purchases gas from Shell. Everyone is now buying from other stations, but there’s only one problem. Overall demand is the same, but our new “per station” demand is higher.
The immediate reaction to this higher per station demand is higher prices. “Wait!” you say, in the long run demand hasn’t changed! Gas prices should stay the same at worst! Well, you’re right – in the long run. In the short run prices spike up as gasoline stations experience temporary shortages. Now, these stations need to get more gas from somewhere to sell to all the new customers they have. It’s obviously available, it just needs to get to the station – but where from?
The answer is of course to buy it from Shell. Our only hope at this point is that Shell will panic, see that it has this excess gas, and dump it on the market at a reduced rate. Let’s assume that Shell does exactly that. Huzzah! We finally did it! Reduced gas prices!
Well, unfortunately for you, Shell is not run by idiots. They know that overall supply and demand hasn’t changed, just that no one buys from Shell anymore (assuming our perfect boycott is still going strong). So, prices end up stabilizing back at the old market rate (since there’s the same amount of people buying gas, and the same amount of gas available, we’ve just changed companies), and Shell ends up selling gasoline to the other companies (assuming best case of no excess transportation costs).
So assuming the best case scenario, we get a price spike, followed by a price dip, followed by the same damn price as before. Since we haven’t changed overall supply or overall demand, the overall price will not change.
The current energy situation is a deeply complex mess. Proposing simple easy solutions that require little effort makes everyone feel better – but does nothing. If internet petitions and email forwards worked on their own, world hunger would have already been abolished.
To those proposing a gas strike – I propose to you a different solution, the public transit swarm. Get everyone you know to give up a car for a workweek and take public transit. Get enough people so that it’s a huge goddamn mess, subway stations are tied up, buses are jammed, and the situation is so bizarre that the media is forced to pay attention. Shout as loud as you can that the reason we drive so much is because the alternatives frankly suck. Have you tried walking to get your groceries in a suburb? Does the bus stop anywhere near your workplace? Does it bother to show up on time?
We need real alternative solutions that will reduce our overall demand on gas. Bringing attention and social acceptance to faster, cleaner, and more efficient public transit systems is a great start.
To those proposing a boycott of a specific company – I propose to you a different solution. Boycott car manufacturers who insist on producing cars with poor gas mileage. Buy an efficient car, or don’t buy one at all. A more efficient fleet of cars on the road reduces demand, and Ford can’t simply sell excess cars to Toyota that magically become greener – so a boycott of lazy companies who are more focused on bells and whistles rather than green technology is more effective.
I don’t mean to insult anyone proposing these solutions – but simply to make you think them through. Your motivation is admirable. Let’s work together to create cost effective sensible approaches to energy policy.