Gas Price Rant #12 The Chug-a-lug bug in your rug · Monday April 28, 2008 by colin newell
As gasoline prices continue to bottle-rocket in the Canadian (and American) marketplace, a torrent of theories attempting to explain the pricing behavior in gasoline markets have emerged. Internet pundits from the CoffeeCrew blog and beyond have their own pet theory about the rising price of motion juice.
So – who is right? And how off the mark am I?
Some sound economic analysis is in order and it seems only appropriate to play a bit of “gasoline price fact or fiction” with stalwarts: supply and demand.
(Theory #1) Gas prices are controlled entirely by wholesalers and refinery oligopolists who collude, cooperate and profiteer at your expense.
Fact or Fiction?
One of the most widespread theories about gasoline markets is that prices are controlled entirely by monopolists in the oil industry – That suppliers may charge whatever high price they prefer with impunity due to collusion and cooperation between cogs in the chain of process. From appearances alone (Prima facie): prices between gas stations tend to move up (and down) in a synchronized pattern, with the suggestion that collusion must be occurring between suppliers.
If one uses the Victoria, B.C. Canada market as an example, one would note that prices move lock step – often shifting city-wide to the exact same point within minutes of any rumor of increase (or decrease)
And while gasoline wholesalers and refiners certainly possess modest “market power,” suppliers do not “control” prices. On the contrary, prices are controlled by the interplay between supply and demand; the collusion whimsy tends to dismiss the demand side of the market. Gasoline refiners and wholesalers have market power because demand for gasoline tends to be insensitive to price changes. “Price in-elasticity” – means that when prices change, consumers’ spending habits change proportionately less than the accompanying variation in price.
Price in-elasticity occurs for several reasons. First, gasoline, has no close substitutes. Without choice, consumers tend to be less price conscious.
Gasoline is also viewed as a “necessity” by most people. There is no option to stop buying fuel as protest. Most people will sacrifice other goods in order to spend more of their income on gasoline – or forgo recreational travel.
Consumers do not have time to alter their buying behavior in response to price spikes. They do not typically adjust to higher gas prices by purchasing hybrid vehicles, riding their bicycles or walking to destinations. Any adjustments in buying patterns take time. In the long term consumers could adjust by finding alternatives, making the gasoline more price elastic. Hasn’t happened yet, has it?
Finally, studies indicate that gasoline expenditures are still a small slice of most household budgets. In 2003, the average Canadian household probably spent less than 5% of annual income on gasoline. At this juncture, Canadian households tend to be insensitive to price changes. We are currently feeling the pinch in the food marketplace as the real impact of fuel costs versus costs of delivery impact the very mechanisms that bring goods and consumables to our communities.
Gasoline is a price-inelastic product. Here is another reason why:
Whether prices fall or rise, people generally buy the same amount. I mean, you can only fill up one gas tank at a time.
Look at it this way: If the demand for gasoline is perfectly price inelastic, and if refineries and wholesale have firm control over prices, why do prices ever stop rising?
They do actually. They ebb and flow. The current price of 1.29/liter is scarcely higher than it was a year ago – It goes up and down. Obviously the trend is upwards
and although we will not stop buying gasoline any time soon, we are certainly going to feel the pain of skyrocketing fuel prices in other ways – some of which we have yet to imagine.
update: Note blog entry from almost a year ago – yup, 129.9
How have prices impacted your life? [3]
Gas Price Rant #11 caffeinated panic sets in · Thursday April 24, 2008 by colin newell
What happens when you have to make the choice; food or gas?
It seems that coffee hungry Californians have made of their minds – much to the chagrin of coffee giant Starbucks
Java junkies looking for that last legal rap on the cortex are counting pennies by sipping less expensive coffee drinks, home-brewing or eschewing the brown elixir entirely. The turning tide is effecting everyone from the mom-and-pop java joints all the way up to Starbucks, which reported Wednesday that it expected lower second-quarter profit and full-year earnings. The economy not its prices appear to be the culprit.
Faced with deciding between a 99 cent of black coffee from the 7-11 and a 4 dollar latte from the Green Machine has never been easier – or so it would appear.
Starbucks is also facing down the Ronald McDonald brand of gourmet Joe which threatens to shake up the specialty market entirely.
Unconfirmed reports have Starbucks C.E.O. Howard Shultz uttering: “Cannot sleep… Clowns might kill me…”
Now I know what he means.
“The current economic climate is the weakest in our company’s history,” said Howard Schultz, Starbucks Corp.‘s chief executive. The company said it was being hit especially hard in California and Florida, which make up nearly one-third of its U.S. retail revenue.
No surprise considering that California and Florida residents would give up coffee, their spouse or certain vestigial appendages before getting out of their SUV’s.
There are exceptions mind you. I will take my coffee before the car thank you very much. I mean, I cannot drive if I am asleep.
I am running pretty lean anyway. I brew specialty coffee in my lab at the University that I work at. I bake all my own muffins from scratch… so my monthly treat budget is pretty low.
So. To those with this tough choice to make, I salute you… by raise a steaming hot mug of Organic Ethiopian Sidamo brewed at exactly 196 degrees (F) into a thermal glass carafe! Cheers!
Thanks to Jeanie Sepin for the inspiration and research that went into this blog
If they say so · Wednesday April 23, 2008 by colin newell
Sometimes you don’t.
Of course… if you are missing details in your visual environment, you will never know will you?
Click on Chemainus Coffee Shop photo at left for full-size
The funny thing about the eye and the human brain… and how they are connected is this:
Your brain fills in the gaps on things your eyes miss. Kind of a fuzzy logic thing.
An example: A colleague of mine spends a lot of time shooting nature photos – and I am always staggered by the quality of the images he gets – because we are using similar technology.
Except that when I take a really close look at his work I start to see the same flaws I see in my digital shots.
Keep in mind that I am a film guy from way back. And despite our advances in technology, even the best full-frame digital dSLR’s are only a baby step ahead of most 99 dollar 35mm point and shoots for their overall quality.
Like the human brain, 35MM (and medium-format) films gather a tremendous amount of information – with little or no need for fuzzy logic or post-processing to get the most out of the image.
And love or hate the technology, it has brought the art and science of photography to just about everyone.
But for me, I still keep my Pentax 35mm loaded up with film… and a venerable Rolleiflex twin-lens from 1965… well, it is freshly serviced and ready to roll if and when I need a crystal clear look into my visual environment.
Gas Price Rant #10 Asteroid run run run · Monday April 21, 2008 by colin newell
From time to time you run into something so concise… so truthful… so simply scary… as to leave you breathless. This brief from the Tom Dispatch pretty much sums up that experience.
Read it. Take the 15 minutes. Drink a coffee.
And gasp along with me.
Warning: Your gas pains may become more acute with this material.
Solution: Ride a bus, car pool, bike or walk – and the discomfort will pass.
