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

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