[If anything, be sure to scroll to the bottom of this post to read some back and forth between myself and some of the individuals who will be “attending” No Gas Day.]
When oil prices are high, it's much more rational to blame government rather than oil companies (Copyright: Jim Hubert 2002)
Recently, I received an invite on Facebook to attend an “event” entitled “No Gas Day.” According to the event’s description, the purpose of “No Gas Day” is to “see if we can organize an event to reach as many people as possible to have a day designated to boycott all gas stations across the planet.”
Once I read that purpose statement, I already knew where this was going. This was going to be another one of those futile attempts to stick it to the oil companies and their greedy, price gouging CEO’s. In other words, it was another economically illiterate individual who doesn’t understand simple supply and demand, but who was mad about recent spikes in the price of oil.
Sure enough, the description continued:
“I know this has been tried before, but not since Facebook has become the phenomenon that it has. So, send this event to everyone on your friends list, and let’s see if we can start our own revolution, by letting these oil companies know we aren’t going to stand for these prices! Simply avoid all gas stations on March 31, 2011. And if you can go one step further, don’t even drive that day. […] We’re mad as h—, and are tired of watching the big oil companies laugh all the way to the bank while we all suffer. Let’s do this!”
With great enthusiasm, the masses (1,457, 867 as of the writing of this post) have come out in droves to click a button that says, “Attending.” Somehow, this will demonstrate their solidarity in standing up against the outrageous greed of oil companies. Somehow, this will send a message to the oil companies that says, “We’ve had it with the price gouging!” Somehow, this will have some kind of unknown effect that will result in something. It has to, goshdarnit! It was organized through the power of Facebook!
Excluding the fact that the individuals who claim to participate in No Gas Day probably won’t have to buy gas on March 31st anyway (Think about it…how many people fill up their gas tanks on a daily basis?), those who do will make up for their lack of consumption on the 31st by purchasing more gas on March 30th or April 1st. This will make absolutely no impact on the oil companies whatsoever.
But beside that small practical detail, I was more concerned with the economics of the boycott. To be clear, I don’t have a problem with the fact that those participants in No Gas Day have a right to organize their boycott, but I do have a problem with the ignorance behind it. Specifically, I was concerned with the highly questionable assumption that “price gouging” exists, let alone that it is a bad thing. Beneath that, I was also concerned with the notion that the recent rise in prices was due to the greed of oil CEO’s and the accompanying notion that “profit” is an evil thing. I was also concerned with how people couldn’t understand the links between potential oil supply disruptions due to conflicts in the Middle East, anticipated demand levels, and the price of oil. And lastly, I was concerned with how individuals were so eager to practically crucify the oil companies when steady increases in government taxation, government-caused inflation, and government restrictions on drilling have been much more significant in increasing the cost of gasoline over the long run.
Thus, I wrote a short post on the event’s wall after promptly confirming my non-attendance. Specifically, I wrote:
Oil companies do not “price gouge” in order to make exorbitant amounts, causing us to suffer. Changes in oil prices are mainly affected by outrageous levels of government taxation (which make up as much as 1/4-1/2 of gas prices) and also potential disruptions in supply that force oil companies to raise prices in order to ensure that oil is properly rationed so that they don’t run out of it. Economically speaking, the concept of price gouging doesn’t exist, let alone make any sense.
Sure, in the end, they make a profit, but that’s what any good business does. Should we stop buying computers until Microsoft and Apple just learn to cover their costs?
I strongly recommend those of you in this group to read two books: “The Law” by Frederic Bastiat and “Economics in One Lesson” by Henry Hazlitt.
By no means was anything I wrote groundbreaking or worthy of a new economic treatise. I also recognize that there’s a whole lot more that impacts the price of oil then the factors I mentioned in my wall post. That said, my point wasn’t to make the perfect argument. I just simply pointed out to the people in the event that, economically speaking, the entire basis for the boycott was fundamentally flawed.
This political cartoon demonstrates the common but unwarranted beliefs about "greedy" oil companies
However, since so many people posted on the event wall so quickly, my original post sank into oblivion within minutes. So I decided to get a little militant. In doing so, I definitely broke the unspoken rule that says that one should not be concerned with the fact that another person is wrong on the Internet. In complete violation of this principle, I decided to re-post my original post several times in order that more people could read my thoughts. A few of these re-posts received responses, but only one of the responses was intelligently phrased. I plan to present that response in my next post where I discuss the economics of price gouging and other related concepts with a little more depth than in this post. However, I thought it would be good to wrap up this post by posting some of the back-and-forth from the replies which suffered from less intellectual fortitude.
REPLY ONE: “[BS]. You sure swallowed that ‘economics’ line, or have stock in the oil companies. Rationing has nothing to do with it, getting as much as possible from the consumers who have to buy gas is the reason for raising prices whenever there is a ‘potential’ disruption.”
My Response: “If that’s your assertion, then why aren’t gas prices at $100/gallon? Why don’t oil companies have armed guards at gas stations forcing people to pay $80, $90, $100/gallon? If their entire goal is to “get as much as possible from the consumers who have to buy gas,” then this is what should be happening according to your premise.
Moreover, gas prices have fluctuated in the past. It’s never been a constant rise. In fact, there have been times where gas prices have actually fallen quite far in the past several years. Your warrantless assertion provides no rational explanation for any decline in prices.
I have no stake in the oil companies (though I find it amusing that you immediately charge me with such an association as if it was a heinous sin to be an oil investor), nor am I an economist, properly speaking. Yet, I have studied and read enough economics to know that those who get riled up over price gouging essentially get riled up over nothing.Moreover, the only true way to stop this fictitious notion of price gouging (I can assure you, starting a group on FB to boycott gas for a day won’t do anything) is to institute price controls which set a limit on the price of gasoline. However, this can only result in shortages since the price will not be allowed to fluctuate towards the equilibrium point. This sets the price at a level too low, causing it to intersect at the demand curve at a point where demand will grow and supply will shrink. This is the definition of a shortage.
Here’s two very brief, but informative articles on the subject by Walter Williams, Ph.D. and professor of economics at GMU:
REPLY TWO: “There has not been a supply issue in many years. It’s a big line of crap to make us think there is. I strongly recommend for you to start looking at the economy and ask yourself, why is it like this? It’s because the elite powers in this world have decided that they are taking control, and want billions of slaves. Why have the U.S. been borrowing money like crazy and not paying it back is a better question. If you think that this is rightful profits, you are sorely mistaken”
My Response: “That’s a wonderful assertion (“Its because elite…billions of slaves”), but until it is backed up with some kind of actual evidence, then it means nothing to any rational individual.
As far as the U.S. government’s proclivity for borrowing money without paying it back, I am strongly against that. If you’re somehow hinting at the fact that our economy is built up on a system of credit instead of sound money and real savings, I am against that too, particularly because government monetary policy has crushed out real savings and sound money. Unfortunately, that doesn’t have anything to do with the present issue of oil companies selling gasoline to consumers in a voluntary transaction.”
REPLY THREE: “Then how come gas companies are making record profits?”
My Response: “Who cares? As long as they provide gasoline and don’t force anyone to buy it, they can make as much profit as they please. Profit is not evil. It is a symbol that people like the service that a company provides so much that they are voluntarily willing to pay for it.
Besides, because the oil industry makes profit, it creates jobs. Isn’t that good for the economy? Aren’t we trying to get out of a recession? The more profitable a company is, the more it can expand, and therefore, the more jobs it can create. Record profits are not symbols of price gouging, just symbols of consumers giving oil companies a big “thumbs up!” for their product.
You also have to take into account that populations are larger and that oil companies serve more people than before. If you have more people buying oil, then you might make more money. Nothing inherently wrong with that. In fact, it’s desirable that, as populations grow, oil companies can adapt to increase supply for more demand. If they make more profit for that, then I’m all for it!
Admittedly, there may be a few warning signs from record profits from oil companies, but they are not related to price gouging or CEO greed. The dollar is becoming less and less valuable, which is a result of the Federal Reserve pumping money into the money supply. This inflationary monetary policy causes an increase in prices since it reduces the value of the dollar. Therefore, part of the reason oil companies may be increasing their profits is because they are forced to raise their prices due to inflationary monetary policy by the Federal Reserve. But that’s not the oil companies’ fault…that’s the Federal Reserve’s fault.”
Such was the task of combating economic sophisms for the day. As stated earlier, there was one responder whose comments illustrated a more adept understanding of the issue than those listed above. But that will be a whole extra post in and of itself in which I explore the issues surrounding oil prices with more depth than in this post.
P.S. After I get off of my “price gouging doesn’t exist” rant, I plan to follow up on my original Rob Bell post with an actual review of Love Wins. I now own a copy of the book and will be reading it soon.