Gas Gougers

I have a friend who owns a local convenience store and gas station. I had an opportunity recently to discuss with him the charges that the petroleum industry is gouging customers.

The issue of whether or not big oil is gouging is a tough one, and he merely pointed out that with mergers and consolidation there is an awful lot less competition in the industry than there was ten years ago. But then we turned to the idea that the local guys are gouging.

He pointed out to me that he often times is losing money on gasoline due to competition. That doesn't sound like gouging to me.

And some have suggested that it is improper for him to raise his prices when he has gas in his tanks purchased at a lower price. In other words, he bought his existing inventory for $2.50 a gallon, and then boosts the price to $2.70. Those who complain, though, overlook one fact. He will have to replace the gas in the ground with the more expensive product. And do you think the consumers will tolerate him leaving his prices high when other prices drop just because the gas in the ground was purchased for more? Of course not.

But he attributed much of the consumer's dissatisfaction to misunderstandings concerning the industry. Misunderstandings the Great Falls Tribune certainly allows to continue, if not actually encourage.

In the recent past, I found two articles in the Tribune (here and here). What you will notice lacking in both is any sort of critical analysis of the issue. Instead, the Tribune is content to quote the disgruntled 'man on the street as news.' For example, in this article, the Tribune allows a fellow to make, without question, the fallacious argument I mentioned above:

"This is crazy," Widner said. "Gas went up overnight. They bought that gas at a
certain price and filled their tanks. This is insane. They are not paying for
more expensive gas."
Again, the consumer overlooks the fact that the gas he is putting in his car is not the last gasoline the dealer will have to buy. Did the Tribune point that out? No.

Or in this article, they again quote the 'man on the street.' "There should be a cap on gas prices," Baron said, referring to the price of gas these days. "This is price gouging." Any challenge to the assertion? Nope. Any mention of what happens when you impose price ceilings on a commodity in great demand? Nope, the Tribune fails to point out what any Economics 101 student can tell you after the first week of class. Limit the price and you'll create shortages. But the Tribune is apparently willing to leave the community with the impression that our neighbors, the owners of these gas stations, are dirty rotten scoundrels.

My friend had another great point. Do you know who really profits from gasoline sales? No, it's not the big oil companies, because they have plenty of bust years. There's only one group who consistently makes money in this industry. Who? The government. Of that $2.40 a gallon you're paying, about $.46 of it goes to the state and federal government. Nice, huh? I wonder why the Tribune doesn't mention that in these articles?


Anonymous said...

You seem to be a bright fellow. Why dont you call Montana Refining Compnay Monday morning and ask them to explain to you how they calculate the "rack" (wholesale) price of gasoline. Ask them to give you the mathematical forumla too. When you get it, post it on here for all of us to see.

GeeGuy said...

Actually, I am in depositions this week. If you would track down that information for me, I would be happy to put it up for you. From your comment, it appears that you have some idea what it will show us. Do tell.

Anonymous said...

Actually that information is more closely guarded than the formula for Coca Cola. Yellowstone County Attorney Dennis Paxinos (R) decided to investigate the three refineries in Yellowstone County for price fixing a number of years ago. He spent well over a year and a lot resources trying to determine how a refinery actually calculates the wholesale (rack) price. He finally gave up--he was never able to determine the formula and of course the refineries would not give it to him...

Anonymous said...

Since gasoline isn't exactly a necessity of life, shouldn't the price be set so as to maximize profit for the share holders? Anything less would be mismanagement. If the argument is that the poor need gas to live then a subsidy along the lines of food stamps makes more sense. Oil companies are not social welfare programs. Artificially holding down prices will just lead to waste. That’s why we all bought SUV’s when gas was just over $1. As soon as labor starts selling its services for what an employer wants to pay (as opposed to market value), I’ll buy into companies selling products based on what consumers want to pay. High prices are fastest way to reduce our dependence on oil. If you don’t believe it go look at the growing selection of gas guzzling SUV’s at the local used car lots.


Anonymous said...

I am a former member of T.S.R.P.S. aka The Secret Rack Pricing Society. Our goal an mission along with the Tri Lateral Commission, was to closely guard rack pricing formulas, conspire with refiners to set rack price, and kill baby seals.

The T.S.R.P.S has been very successful keeping our secrets. We have been investigated over the years by various local, state and federal governments and not one prosecution. I am taking a great risk revealing this information. All previous whistle blowers have been silenced, if you know what I mean.
That is why of all the thousands of people that have been members of our society no one has come foward to reveal the truth.

Anonymous said...

We seem to have this unwritten policy in the U.S. that the only thing that really matters is low fuel prices and low food prices. Isnt there something like 2 cents worth of whest in a laof of bread?

Treasure State Jew said...

Y'know, none of this is rocket science. It would help if more public policy guys would take basic accounting.

All public corporations regularly publish a document called a "Statement of Profit and Loss." That document allows corporations to be compared, apples to apples. It does so because the accountants that compile the statements all use a standard "language" called Generally Accepted Accounting Principles to for the numbers.

Using that P&L, you can figure out all sorts of things. For instance, you can compare a company's sales (usually called "Revenue") to the cost of materials sold.

As an exercise, I went to ExxonMobile's website and looked at their P&L (which they call a "Summary Statement of Income", page 22).

For the past five years (2004-2000), Exxon sold had sales, mostly all of oil, of $298, $246, $204, $212, and $231. (All numbers are in Billions of dollars).

For the same five years, Exxon had a rough cost of materials sold of $164, $130, $110, $111, and $127. Again, all numbers are in Billions of dollars. I got this figure by adding together the posted crude oil purchases, production and manufacturing expenses and exploration expenses.

If you subtract the revenue from the COGS, you will get a gross margin for each of those five years of about 45%. In other words, as oil has increased its price, Exxon (and vicariously, the industry), has not used the opportunity to increase the margin at which it sells oil.

Most manufacturers sell their product at about double their COGS. I don't call that gouging.

GeeGuy said...

But, uh...where are the rockets?