The Truths and Myths About Big Oil

With national gas prices now averaging something close to $3.00 per gallon, I'm absolutely astonished at many people's lack of common sense. You hear terms like supply and demand thrown around like the newspapers its written on, but based on e-mails I've received, I think it deserves another look.

At any point in time, there are a finite amount of resources available for everyone. This is the supply side of the equation--oil. We, the consumers, who like to drive everywhere, are the demand side of the equation. As consumers, we don't have a whole lot of control on the supply side of things, but we have a huge impact on the demand side of things. If demand goes up, so does the price. If demand goes down, so will the price.

It's like a good old fashioned auction where the highest bidder wins, and don't be fooled--oil prices work just like an auction except on a much larger playing field. If you want proof, try selling a gallon of gasoline on eBay and see how much you can get for it. I'd be shocked if someone were willing to buy it for a price that is substantially different than current, local prices. You can't sell it for more--nobody would buy it and go to the local gas station instead. You could try selling it for less, but everyone wants gas for less and they'll eventually bid it up to near or at current local prices.

I've gotten e-mails from close friends who, until they forwarded me the e-mail, I thought were highly intelligent enough to grasp the concept of supply and demand. Take the 'gas-out' campaign that seems to rear it's head every time gas prices go up. The e-mail suggests that if everyone does not buy gas on a certain day of the year, that means demand goes down and therefore prices will follow. Two problems with that:

First, unless people STOP using those resources on a given day, it just pushes demand from one day to the days before or after the gas-out day. Overall, demand doesn't change at all.

Second, even if somehow the laws of supply and demand were somehow overcome and prices did drop a noticeable amount, everyone would start buying less fuel-efficient cars, drive more often (instead of carpooling, walking, biking, or using public transportation), and so forth. Demand goes up, and prices end up back where they were before.

It's ridiculous, and anyone who's taken an high school econ class could see the e-mail was created by someone who obviously flunked the class in spades.

Then I got an e-mail from another not-so-brilliant friend, forwarded around the world multiple times, saying that the gas-out idea was just plain STUPID since it doesn't really change demand and thus affect gas prices. No, instead we should boycott certain brands of gasoline. Those companies will be forced to lower prices to sell their product, then other gas stations will have to follow suit to stay competitive--ergo, lower gas prices.

Have you ever been to a gas station--take Arco, for instance, since I see this often at Arco stations--with lines around the block because the gas is two cents cheaper than the gas station across the street where there's barely a car in sight? Just because Arco has cheaper prices, do all of the other gas stations nearby automatically lower their prices to stay competitive? No. Do you know why? Because I get my gas at those other stations. Saving less than 50 cents for a tank of gas isn't worth the wait it would require for me to get to the front of an Arco line, and I'm willing to pay that little bit extra for the extra convenience.

Let's say the Shell station (and why not Shell?) is located across the street and decides to lower prices even lower than Arco. What happens? Everyone starts getting gas at the Shell and leaves Arco? Probably, but the Shell station probably won't stay in business for long because they're selling their goods at a loss. There is a lower limit to how low prices can go, and no business will deliberately price themselves out of business.

It's actually much more complicated than that. Many gas stations share gas. Companies like Costco will buy their gas from whoever will sell it to them the cheapest so if you boycott one company and they drop their prices, Costco will start buying from them and make up the slack. It's like one of those long balloons filled with air. You can squish one end, but then the air moves to the other side of the balloon. If you squeeze both ends, the air will pop out in the middle. It doesn't matter what you squeeze, the displaced air will always find somewhere else to go.

But is it really shocking that gas prices have gone up like it has? It's all about supply and demand. For years we've known that oil supplies are tight. New oil finds are becoming more and more scarce and existing oil supplies are drying up. Supply is going down. All the oil drilling in the world won't stop that. The US passed its peak production rate decades ago, and there's some debate that the world's peak production rate has already passed. If it hasn't passed already, it almost certainly will within the next decade or so. Supply IS going down and it will continue to go down, thus driving prices up.

And looking at the demand side of things--in the era of 'cheap gas', people became wreckless. We became a country of SUVs and Hummers and did not care about fuel economy. Demand for this increasingly scarce resource called oil continued to grow.

And now the public is irate that gas prices are so high? Well, DUH! I remember a few years back when gas prices were near $10 per barrel and I thought, "Now THIS is the time to invest in oil!" I actually did buy into a couple of oil companies which I held for a couple of years and they did quite well as oil climbed to $30 per barrel. I finally sold the stocks--not because I didn't think oil prices would continue going up (no, I knew oil prices were going to keep going up)--but rather because I felt guilty for owning oil companies. I hate their environmental track record and I hate oil. For those that know me, I like to walk. I walked from Georgia to Maine, and in 2008 I'm planning to walk from Mexico to Canada. I'm currently 'thru-hiking' the city of San Luis Obispo. I walk to get groceries, I walk to the movie theaters, and I walk, and I walk, and I walk. Often, months go by and I don't drive. I once filled up the gas tank in my car in November and didn't have to refill it again until four months later in March!

But I always considered oil a necessary evil and thought I could buy an oil company and not have any qualms of guilt. I was wrong, so I finally sold my stake for a rather large gain knowing full well I was leaving money on the table. It wasn't worth the guilt.

In regards to taxes--the government collects taxes on every gallon of gas that's sold, and I've heard talk about some states cutting the tax to help make gas more affordable. The problem is: It just won't work.

There's only a limited supply of oil, and the oil companies want to sell every last drop they have. If the taxes on gas are reduced, oil companies will HAVE TO raise prices so the retail prices stay the same. If they don't, people will start buying more gasoline (it's cheaper, after all!) and since supply hasn't changed, they'd run out of oil.

Instead of gas prices going down, a cut in the taxes by the government means that the government has less money to maintain roads and bridges which means they'll either have to raise taxes elsewhere or cut funding for other important programs like education or police to make up the gap. And, since retail prices must stay the same, the very oil companies being accused of price gouging will have to raise the price they sell oil and make even more profits!

I'm very disappointed in our government not taxing gasoline more than they do. Driving has been artificially cheap since Mr. Ford built his first cars and nobody seems to realize the true cost of the automobile lifestyle. Road, bridges, tunnels, street signs, and so forth cost a LOT of money, and it would make sense that the people who use them most should pay for the cost of creating and maintaining them. And the easiest way to do this with a tax on gas. Those who drive more use more gasoline, and therefore pay the most in gasoline taxes, and therefore pay a larger percentage of road costs. But most roads and infrastructure are not supported with gas taxes--they're supported though income taxes and property taxes and goes into some big black hole that nobody keeps track of where it ends up.

So the main cost of driving is just the gasoline. The cost of the roads, bridges, signage, and so forth are largely covered through other taxes. Do you ever wonder why the United States has gas that's so much cheaper than any other location in the world? It's because most of the world pays for their roads through a gas tax. The cost of a single gallon of gasoline in Europe (it was about $8/gallon when I was in England) is the full cost of driving. We're still paying that, but the taxes are hidden making the true cost of driving seem much lower than it really is.

I'd like to see gas prices reflect the true cost of driving and stop funding roads through hidden taxes. Sure, we'll be paying more for gas, but income and property taxes should be reduced accordingly so the total amount of tax being paid doesn't change at all. Somehow, I don't see any politicians having the courage to propose more than doubling the cost of gas, but imagine if this could happen!

Research into fuel-efficient technologies would be unprecedented. Companies like Ford and GM that relied so heavily on cheap fuel might now be kicking Toyota and Honda's butt after having developed the first hybrid vehicle instead of wallowing on the brink of bankruptcy.

If you want to lower your gas bills, though, your best bet is to do it the old fashioned way. Get out and walk, bike, or use mass transit to get around town. And as an added bonus, it's healthier too. =) (It's true--there's at least one study that shows that there is a direct correlation between a person's weight and how much they drive.)