Tuesday, May 29, 2007

Two Things

The first is a quick thing. Carrie showed me this cool website where you can go and sign up to receive a weekly email telling you how your representatives in Congress voted on bills that week. I signed up last week and I wanted to wait for my first email before I recommended it. I just got my first email and I have to say that it was a very simple, not flashy, useful thing. I would recommend it as a way to keep up with what the people you voted for (or not) are up to. The web site is www.congress.org. It seems like the users of this service are mostly right wing (based on the poll results they post) but there doesn't seem to be any partisan lean to the site itself. Enjoy.

The second thing is more in depth. Mostly I happen to know that at least one vocal economist reads this blog and I want to hear what he has to say about this idea. I don't know a lot about the details of the current system but there is obviously something wrong with gas. I don't understand (in my simple econ mind) how gas companies can be registering record PROFITS while at the same time claiming that the prices we pay are a result of increased prices from the source (the middle east). My bet is that there is quite a bit of price gouging and a not trivial amount of price fixing as well.
However, it is my understanding that individual gas station owners are not sharing in these record profits. So that means that the inflation in the price must be somewhere before the gas gets to the station.
Here's my idea. As things stand, almost all gas stations are affiliated with a major oil company (Shell, BP, Exxon, etc.). What if we made that affiliation illegal. Let's make gas stations no longer franchises. Instead, each gas station would have the right and the ability to purchase their supply from any of the major oil companies. It seems that this should help to eliminate the huge mark up that the station is forced to pay.
A few issues that I can foresee right away are infrastructure and price fixing. It is probably not easy for a gas station to change their supplier every month. However, it seems like it would be in the interest of the oil companies to make this service accessible. The second issue, price fixing, is illegal anyway. I'm not sure how we can prove it but it is certainly a problem.
Ok, so I throw those two things out there in the hopes that this will help to educate me on the issue. Please, let me have it. Why is this a bad idea?


AdamB said...

Hmm. I don't know anything about the gas industry, but let's think about it.

Usually when you add more constraints to a problem, it makes things less efficient, not more efficient. I don't see why that wouldn't be the case here. I mean, independent gas stations aren't illegal currently, and I assume if one could retail gas more cheaply under that model, it would be more commonplace.

But it's possible that there are too few gas suppliers out there, so they are maintaining a cartel and none of them will sell gas to independent stations. Do we have any way of finding out if that's true or not?

The whole price gouging thing could theoretically be a big problem, especially if there are only a few major market participants. I'm not sure if that's the case.

The phenomenon of making increased profits during times of decreased supply is consistent with economic theory, though (given high barriers to entry, of course). The most usual example of this is wheat or milk. People are fairly insensitive to price in how much milk they buy--it's sorta necessary and it's not a big portion of income. So when supply is restricted and marginal costs increase, it's often the case that the resulting price increase more than makes up for the additional costs.

This should only be true in the short run, though. If the returns are consistently higher than what is expected at the risk level, then more people will want to start getting into the gas business and drive profits back down.

Does that make sense? Wasn't as clear as I hoped, so let me know if I should try again.

It would be nice if there were a way to identify price gouging in the data. But unfortunately it turns out to be quite difficult.

What really fascinates me, though, is that high gas prices might have positive welfare effects overall. Gas is notoriously underpriced, because it doesn't fully include the cost of highways, traffic accidents, pollution, noise, traffic jams, urban sprawl, suburban douchebaggery, strip malls, etc. Bicycles are underpriced because they don't include their resulting reductions in those social ills, not to mention lower healthcare costs.

If you want a gas-related campaign to get behind, it should be to shift from income taxes to gas taxes. Lower taxes for the working middle class (whom gas price increases would hurt the most) and raise gas taxes such that it is revenue-neutral. The resulting cost to the government is zero, but society faces higher returns to walking and lower returns to buying bigass SUVs and moving to the 'burbz.

Economists don't agree on much, but most do agree that shifting from income taxes to gas taxes is a good idea. What do you think?

Seth said...

Yeah, Adam. I've heard several people advocate shifting to gas taxes and it make sense every time. It is the best way to put real pressure on automobile companies to create alternative fuel vehicles, without us having to literally run out of oil first.

Matt, I've wondered the same things you point here about gas profits. I bet there is someone out there who has put a lot of effort into finding the weak link in this economic chain. I might look into it later, but I have to go prepare for my inaugural voyage to the radio waves.

Matt Grosso said...

First off, I'd never heard of that gas tax concept. At least not said in that way. I like it a lot.
Secondly, I hear what you are saying about how more regulation can make things less efficient but there laws in our system which are examples of REGULATION which makes the system work better for more people. Not to get into a whole debate about it because I'm really not qualified but I'm pretty sure that free-market without any regulation at all is a very efficient way to make very few people really wealthy. It is with this in mind that we have anti-trust laws.
It seems to me that if the providers of gasoline are in cahoots it doesn't matter that it is not illegal to open an independent station because they can refuse to provide gas. You make this point and I agree with you.
Your comment about how price gouging should be balanced out by an increase in the number of gougers over time seems correct for some situations but not others. When those who are gouging control all of the means of production then there is no possibility of new gougers and therefore more supply (same demand) and lower prices.
Another thing you said that I agree with is the fact that higher prices actually have many benefits to society on the whole. I try hard not to complain about the high price of gas because of this. However, there is a problem that in our society we are set up as an economy based on gas. If the price of fuel goes up, everything goes up, because it costs so much to move things around. How do we adjust our infrastructure to allow a decrease in gas usage without the ensuing increase in everything?
I'll tell you how: we need to work on the Star Trek transporter.

AdamB said...

I'm not saying regulation necessarily makes things less efficient. I'm saying that there is no evidence to support the idea that having franchises makes the price higher. I don't even understand the argument, really.

I mean, even if your law went into effect, wouldn't the same companies still set the same wholesale prices? So I guess we're agreed that the grounds for your proposed law is dubious.

The competitive free market with no regulation at all works very well, but it's very rare. There are almost always market failures which justify some kind of intervention. Anti-trust laws are a perfect example--if the market was already competitive then we wouldn't need anti-trust laws.

The reason that more gougers makes gouging less likely is that the agreement becomes unstable. It becomes more difficult to prevent defections from the cartel.

I'm not sure what you mean by controlling all the means of production. Does Exxon control the companies which sell pipes or build wells? I think new oil companies are started all the time, especially when profits are high.

You are correct that as gas prices increase, the price of many other things increases a tiny bit. But that's good because the true costs of transporting those goods were never fully accounted for in the first place. Having fresh Argentinian mangoes in winter regardless of the true costs of transportation isn't a human right.

But the cost of a lot of other stuff decreases, too. Cars would probably cost less as they are driven less often. Healthcare costs less as air gets cleaner and people walk instead of crash. The price of keeping a neighborhood from having a superhighway built through it is lower. The price of riding a bike is lower because more people do it and fewer cars run you over.

The main point I'm trying to make is that it's a good thing that the prices of some goods go up, too. I mean, that's really the whole point of raising gas prices. If the price of a 50-mile commute didn't go up at all, what would be the point, you see? Buying an Argentinian mango is the same as a 50-mile commute.

The way to adjust the infrastructure is to increase gas taxes and spend less on oil subsidies and highway building.

Gas taxes higher. Income taxes lower. It's a fantastic idea. I only wish I could take credit for it.

Lauren said...

Hi. I like this blog, you have a neat way of thinking out problems.

I do know a bit about the energy industry and so I'm not sure the gas companies are making out like bandits though here - yes they are making more profits but they are having to reinvest in their companies more than before. Mandatory shareholder payouts, increased expenses for secondary and tertiary recovery methods and oil exploration, increased refinery capacity or new refineries, maintenance, advertising, and other energy projects (Shell and BP for example: combined heat and power natural gas, biofuel, hydrogen).

Plus, the reserves are finite and we have been lied to about how much oil there is in the world at least since the 1940s. The oil-producing countries leaders get their power from managing the reserves - its like a fiduciary relationship so they cannot admit they've depleted the oil (by pumping too fast and decreasing pressure in the seam and overall availability) so we used to get an overestimate of supply.

I think we should get to work on that Star Trek transporter!

Matt Grosso said...

Well Adam I'm not sure how you figure that "we're agreed that the grounds for [my] proposed law is dubious." I'm not in agreement.
The basis for my proposal is that there doesn't seem to be direct competition between the oil companies at this point. The onus is on the individual gas station to make the place nicer or to lower their prices within the small profit margin the owner has. I want the onus to be on the supplier not the distributer.

AdamB said...

Matt: You agreed here:
It seems to me that if the providers of gasoline are in cahoots it doesn't matter that it is not illegal to open an independent station because they can refuse to provide gas. You make this point and I agree with you.

There you have it. If we adopted your proposal, gas companies could still set the terms to stations. Under your hypothesis of price fixing, of course.

But that's beside the point, because you also agree that high gas prices increase overall social welfare. So price fixing would be good for society, no?

Lauren: I guess we were meaning that high profits indicate that owners of gas companies are doing well. Reinvestment and dividends increase shareholder value. Expenses like advertising and maintanance are counted before profits are calculated.

Unless you mean that current profits are in fact justified by the high risk of gas company ownership. But I'm only thinking of profits above those justified by the level of risk involved.