Gasoline… Why Everyone Has It Wrong

gaspricesUpdate: It’s been two years since I wrote this, and in light of how much the price of oil is dominating the news lately, I think I need to revisit this… soon.

Talk of gas prices is everywhere. It’s actually beginning to annoy me. Is the media so hard on their luck for a good story that they’ll keep banging away on this one? Believe me, this is an overblown crisis if there ever was. The only reason this paranoia sticks is because gas prices are a number eveyone sees as they drive around… and a number that everyone pays at the pumps… so the same monkey-see-monkey-do that gave us a new millennium in 2000 (vice 2001) is convincing us that this number is going to end all life as we know it. I think not.

Every time you see a news story about the “catastrophic sky-rocketing” price of gasoline they always stick a microphone in the driver’s window of some rusty lemon and get candid comments from a below-average joe claiming to be sweating crude because he can’t afford to buy gas to go to work… but he’s got $20 of McDonald’s and $15 in cigarettes sitting in the front seat. And seriously… a buck more a gallon makes commuting to work unaffordable? Are you kidding me? Where do you commute to work… the sun? We’re paying a fraction of what Europeans pay… is it still too much? We’ll pay $2.75 for 12oz of Spring Water (whatever the heck that is) and $4.60 for a 16oz Mochaccino, but that extra $5 that it’ll cost to drive to work this week is out of the question? Puh-lease.

This is the friggin’ United States of friggin’ America. This is an amusement park where everyone is richer than they realize. Really. People drop $5000 on a family vacation but then tell the news reporter that because of gas prices they’re afraid they’ll have to change their plans. What?! NEWS FLASH: Unless you’re going to travel the friggin’ country by automobile gasoline is not, has never been, and will never be the primary, secondary, or tertiary expenditure on a vacation. This family who’s ready to drop five G’s is going to pay about $30 more in gas. That’s less than 1% of their total vacation cost and they’re thinking of scrapping the whole thing?! What about sales tax (from around 5 to 8%)? Sales tax is like ten times the extra cost of gasoline on our vacations… but I don’t hear anyone saying that they’re going to have to scrap that exotic nude tropical island getaway because of the blasted sales tax. School taxes will go up ridiculous amounts each year… hundreds of dollars… but everyone would rather freak out about the extra $.80 in gas it cost to go to the mall and buy $125 sneakers and $62 cologne. I feel like I’m taking crazy pills.

Should I mention that many complaining of fuel prices are driving highway-legal Sherman tanks not known for their efficiency? That’s ok… the people didn’t buy them for their efficiency… because they didn’t have to… because they could pay $20 a gallon for gas before they’d change their driving habits. And you know what? They’d probably still buy the Sherman tank. And nothing says “I Love Me” quite like a Lincoln Navigator or a Cadillac Escalade.

supply and demandSpeaking of habits and behavior… oil is one of the most inelastic commodities there is… and until oxygen is no longer free oil will probably be THE most inelastic commodity (see the graph to the right). In our society everyone drives except in deep urban settings with robust public transportation systems. inelasticAs such, people will buy gasoline so they can drive where they need or want to go. The price of gas goes up… but people still buy the same amount of it. Why? Because their driving habits stay the same. In our culture it’s not like we’re all in a big dorm room and all my dorm-mates head to the same class at the same time every day and we can carpool just like that. No. Everyone does their own thing and they have different destinations… different stops on the way… different times they like to leave and different times they like to arrive… and in our fiercely independent society nobody is in a hurry to give any of that up an inch, even if it means paying more in gas. We’re demonstrating everyday that we’re willing to pay mad duckets in gasoline so that we don’t have to change our personal routines… myself included.

And with regard to gas prices… many like to target the oil companies because they’re making record profits. Well done them. Here’s another NEWS FLASH: Oil companies don’t set the price of gas. Their profits are reflections of the rising price of gas. If you purchase real estate and the price of land in your area jumps up, then you’ve made yourself a big profit. Well done you. Oil, being a commodity, is set on the commodities market… and the price is whatever commodities brokers are willing to pay. Most of the fluctuations in price are due to human skittishness and fear more than anything. And it’s too easy to envision the oil companies as fat, white, middle-aged CEO’s who are stealing these so-called profits right out from under us. Oil companies are like any big company… they are tens of thousands of employees of various levels who are all smiling at the high cost of gas… just like you’d be smiling if you’re industry came into mega-bucks. Now, if you want to ask why the CEO gets a $400 million dollar bonus… that is a good question, but not related to gas prices.

So what’s the solution. Ask four people and you’ll get five answers. There’s no viable competing auto fuel that’s feasible for present-day society… maybe eventually electric or hydrogen cars will be more prevalent, but not yet. So as long as gasoline is the only car fuel and we refuse to change our habits the demand curve for oil will stay inelastic. As long as the demand curve is inelastic there won’t be sufficient feedback in gas prices to offset the rising costs of it. In effect we’re all doing the Kabuki Dick Dance here… so if you want to do something proactive either learn all the horse trails that lead to your job and local malls, or do what I did. I heavily invested in oil funds, both last year and this year, and I’m smiling ear to ear when I see the price fluctuate, because I make money the more scared people get about gas and the future of energy. So please… be afraid… be very afraid. ;-)

When life hands you lemons, make lemonade.
- unknown

u comment i follow 30 Comments

  1. Christina
    Posted May 24, 2006 at 9:39 am | Permalink

  2. Posted May 27, 2006 at 5:13 pm | Permalink

    Great article! That Walter Williams is a brother that’s always on his ‘A’ game. I love reading his insights… and that article is right on the money (pardon the pun). Great find, Christina!

  3. John3Sobieski
    Posted December 4, 2007 at 11:06 am | Permalink

    At our family Thanksgiving party, Grandma T was telling us about how everybody panicked a long time ago. Tickets to movie theaters cost 10 cents. The government, as part of the WWII war effort put a 1 cent tax on the tickets. Everyone was POed. When I’m a grandfather, and gas costs 40 bucks a gallon, I’m going to tell my grandkids about how everyone panicked when gas prices jumped from 3.80 to 4.10. Then, they’ll be just like me when I heard grandma’s story. “Thirty cents? Thats It? Whoopdy doo.” Point, gas prices don’t really matter at this moment. They won’t be at a true crises point for a good long time. After all, no one complains about 10 dollar movie tickets.

  4. Zerlan
    Posted February 5, 2008 at 2:56 pm | Permalink

    This article is a great peice of work. He hit the nail on the head I mean we all complain about gas prices but like he said will have Burger king or mcdonalds in the front seat. I we just stop eating out as often America wouldnt be as obese as it is and we would not complain about the prices of gas because we would not need to go to fast food joints.

  5. Posted May 23, 2008 at 12:22 pm | Permalink

    Gas prices have a higher effect than just limiting a family vacation. Everything bought and manufactured has an energy cost built into it’s price. Inflation is the bigger issue.

  6. Posted May 23, 2008 at 2:57 pm | Permalink

    You are correct. And this is both a factor, and a non-factor, in the debate. Due to gas’s inelasticity the supply and demand curve for the fuel contribution to the price of products gets passed on to consumers… who then need to buy less so that the prices on THOSE products stabilize to a new steady state.

    I wrote this article 2 years ago.. I think it needs freshened. :-)

  7. John3Sobieski
    Posted May 23, 2008 at 8:36 pm | Permalink

    Whoa, dude, you just used terminology from my economics class.

  8. Posted May 29, 2008 at 6:57 pm | Permalink

    Hey WarAxe. I like your style. A man who plays guitar and understands finance. I play metal guitar… maybe we could put on a concert to support Exxon family workers. LOL. Take care and keep on jammin!

  9. Posted May 29, 2008 at 10:05 pm | Permalink

    Yeah… I took some classes in that, too. :-) I actually “concentrated” in Economics… which I guess is like a “soft” minor in a curriculum. I took intro, macro, and micro… and truth-be-told it really helps cut through the media hype of marketplace hysteria.

    @Jim Bisnett
    Thanks for stopping by. If I was going to have a benefit concert the proceeds would go directly Haliburton. :-)

  10. Posted September 5, 2008 at 4:37 pm | Permalink

    This is an interesting take on the problem and I like it because you look at the problem in a new way. It seems like many of the proposed solutions won’t do much to actually fix the problem, only stop the bleeding for a while.

  11. Posted November 10, 2008 at 12:59 am | Permalink

    I really dig the picture of the gas prices, really glad the prices have been going down though.

  12. Vero
    Posted June 2, 2010 at 11:22 am | Permalink

    A man who plays guitar and understands finance. I play metal guitar… maybe we could put on a concert to support Exxon family workers. LOL. Take care and keep on jammin!

  13. Posted November 8, 2010 at 6:20 pm | Permalink

    Believe me, this is an overblown crisis if there ever was. The only reason this paranoia sticks is because gas prices are a number eveyone sees as they drive around… and a number that everyone pays at the pumps… so the same monkey-see-monkey-do that gave us a new millennium in 2000 (vice 2001) is convincing us that this number is going to end all life as we know it. I think not.

    and in our fiercely independent society nobody is in a hurry to give any of that up an inch

    What if they have to? What if the world is actually at peak oil, something you American’s went through in the 70s and is why you now import so much oil? What if because you built such silly, individualised and car dependent suburban city plans you’re now one of the most oil vulnerable nations on earth? What then?

    Do you know oil is food? Do you know how much energy it takes to grow 1 calorie of food?
So, I can hear you immediately thinking peak oil is just a lefty conspiracy to take over and tell us all what to do and how to live. Wrong. It’s science. It’s maths. It’s sticking a map up on the wall and crossing off the oil producing nations of the world one after another as they peak and go into terminal production decline. That doesn’t mean they run out overnight, but it does mean they move from producing ever more light sweet cheap crude to ever less foul stinky sour crude. The age of sweet oil is turning sour, and this is what we are seeing at the pump. So invest in gas. When the stockmarket crashes and oil is nationalised under the IEA’s “Liquid fuels emergency act”, will you really get any benefit from your stockmarket tinkering? You’re fiddling while Rome burns.

    Peak oil Top 10

    1. In which decade did we discover the most oil?

    2. How has the discovery of conventional oil been going since then? Keep in mind that oil is probably only 2nd to the military in terms of the money and technology available to their enterprise. Big oil have BILLIONS at their disposal for the latest discovery and drilling technologies.

    3. What is the ratio of discovery to consumption? Are we discovering more than we use, or less? How good or ‘bad’ is the ratio each year?

    4. How long has the trend been in this direction?

    5. How many oil producing countries have already peaked and are in irreversible decline? What are their decline rates?

    6. Which countries are still able to increase production and have not reached their all time historical peak?

    7. Is there an ‘international oil cop’ agency that audits the fields and confirms the books of various oil blocks? Who reports to who? What is the chain of command down which the oil data has to travel in the non-OPEC western world?

    8. How do we know whether OPEC reports are legitimate? Who do they report to? Who can audit their books? Does the western world get access to their fields? How do we confirm what they know?

    9. If domestic consumption of oil exporting nations rises too fast (because of a booming domestic economy), how quickly can domestic consumption outpace their ability to export oil once they themselves peak? (Hint: there are historical precedents — google “Export Land Model”).

    10. If those few exporting nations that are left suddenly DO decide to keep the oil for their own economies, how relevant is a global depletion rate of 5% per annum if the OIL MARKET has collapsed because ‘sellers’ are becoming ‘buyers’?

    Lastly: here’s the real issue once someone finally does the math and realises the world is about to hit 4% less oil each and every year from here on in…

    Is there any liquid fuel that can replace oil in the scales we need, the time-frames we need, and the infrastructure in which we burn it?
    Answer: No. The only way to adapt to peak oil is to use less oil.

    There are answers to this crisis. But you’re going to think they are socialist until you maybe travel to Europe and spend some time falling in love with a more appropriate city plan that just doesn’t require as much oil based transport in the first place.

  14. Posted November 29, 2010 at 4:21 am | Permalink

    No answer to the geological limits I listed above?

  15. Lemon Law Help
    Posted January 29, 2011 at 12:05 am | Permalink

    Good Information blog… Please keep posting

  16. Posted January 29, 2011 at 1:20 am | Permalink

    Hi Lemon Law,
    the problem is the blog owner hasn’t responded to my top 10 questions yet?.

  17. tax credits calculat
    Posted January 29, 2011 at 10:11 pm | Permalink

    Oil prices have more than a simple meaning of the holiday family. All purchased and built at cost of energy included in the price. Inflation is the biggest problem.

  18. Posted January 29, 2011 at 10:52 pm | Permalink

    No ‘Tax Credits Calculated’,
    inflation is NOT the biggest problem! Geology is. You’ll see. The American Joint Forces Command is convinced by the impending geological realities to estimate that by 2015, the world’s production of oil will be *down* by about 1/8th! That means we are at peak oil now, and that oil production can never again meet demand.

  19. Posted February 20, 2011 at 12:26 am | Permalink

    @Eclipse Now you said in your top ten that oil has the most resources second to military. Where did you get there prices?

  20. Posted February 21, 2011 at 9:33 pm | Permalink

    Prices? I’m talking about the sheer money invested in the whole enterprise worldwide. It’s a claim in “Half Gone” by Dr Jeremy Leggett, Phd in oil discovery. I think the context is ‘resourced for R&D kit’ — having the most money to produce the most effective tools for the job.

  21. Posted February 21, 2011 at 9:37 pm | Permalink

    PS: Scrapper, I really like the goal of your blog, encouraging people to recycle metal. It’s going to become ever more important as we reach peak conventional metal ores, and basically are reduced to ‘mining’ copper and uranium from what may as well be your backyard! Well done on an interesting looking blog. If I only had more time… so many blogs, so little time.

  22. Posted March 2, 2011 at 12:08 am | Permalink

    @Eclipse Now Thanks for clearing that up, and thanks fr checking out my blog! I have to admit, I don’t have much of a political agenda, which I see your blog has more of. Maybe I will take a page out of your book one day soon, and write about some of the more important reasons metal recycling needs to become more common place outside of industry (which honestly is doing a terrible job of recycling up until maybe a few years ago, but still not good enough by a long shot).

  23. Inflammatory Disease
    Posted March 2, 2011 at 6:44 am | Permalink

    Gasoline prices will always be on the upward trend. That is because our economy and our way of life is built on it. Without gasoline/oil our economy would grind to a halt. It is a necessary expense and one that I would love to do without, but then again, it is nice being able to have the things that it provides.

  24. Posted March 10, 2011 at 4:19 pm | Permalink

    Agreed! And just to show that while I take peak oil very seriously I’m not one of those peak oil ‘doomers’, let me share my page on nuclear power. New nukes are safe due to the laws of physics, can be built on a production line, and can EAT NUCLEAR WASTE! Indeed, IFR’s could run the world off today’s nuclear waste for the next 500 years!

    Nuclear waste isn’t the problem, it’s the solution!

  25. Posted March 10, 2011 at 4:19 pm | Permalink

    Ooops, I forgot that link.

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  28. Ednah Allen
    Posted June 29, 2014 at 11:14 pm | Permalink

    Hi, I can relate to your article about Gas. I appreciate what you want to impart. It must have been the most discussed topics and the most common problem nowadays and it is the rampant increase of price commodities because of higher cost of gas. However, I think , you are correct to say too that people still spend for it the way they normally do. In my opinion, I guess , we just have to find ways to discipline ourselves with regards to gas consumption instead of focusing too much about its high price in the market.

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