Mechanic’s Tale: Gas

Mechanic's Tale: VW, Heal Thyself by Douglas Flint (8/15/2005)
Volkswagen needs to be the people's car, not the mechanic's friend.

More Mechanic's Tales from Doug Flint 

While I was on my relaxing but pathetically short one-week vacation, the country fell apart in the aftermath of Katrina. New Orleans is still under water, Mississippi and Alabama were also hit hard, crippling the oil output and terminal activities on the Gulf and driving already-rising gas prices even higher. The good news is that the oil platforms were not that badly damaged, and they should be back online within a few weeks. The bad news is I am hearing the same asinine talk that led to gas shortages during an earlier part of my driving life in 1979.

Talk of price gouging and rip-offs abound. This is soon to be followed by calls for investigations and oversight committees, then calls for price controls. I would be lying if I told you I am an expert in the oil business. But since it is a commodity, it works as all commodity markets work, following the rules of supply and demand.

As far as gasoline sold at the local level, I do know a little about it, so let’s cover some basics. Understand that I don’t care what state laws you have concerning price gouging, because in my view such laws are silly. Any law that intends to circumvent market forces is as foolish and as useless as trying to outlaw gravity so that we can all fly free.

I’ve noticed that no one ever complains when the market benefits them. You buy a townhouse and it doubles in value in two years and that’s called wise investing. Would you like a law that says you can only mark your real estate up a fair amount, say ten percent, in any given year? What, are you price gouging? Oh, you’re simply charging what the market will bear. Well, I’ve got some advice. Don’t expect anyone to act any differently with their property than you would with yours! Q: “But Flint, no one is making you buy my house.” A: And no one is making you buy gas at a particular spot. Q: “But Flint, everyone needs gas!” A: And everyone needs food, a place to live, and underwear (I think).

Gas stations and price gouging

The gas station owner makes a commodity investment every time his tanks are filled. If he is affiliated with a major brand such as Exxon, he must accept any delivery that comes and have the money to pay for it immediately (it is electronically debited from his account). So when making a pricing decision, it can’t be based on the cost of the gas he has in the ground, but rather what the next fill-up is going to cost him. He has to have the money available. But his ability to charge is tempered by what the guy up the street, who may have lower or higher operating costs, is charging.

It cuts both ways. Sometime a station gets a high-priced shipment just as prices are falling. Then the station owner must decide if he wants to watch his car flow slow down to nothing as he pedals his overpriced gas, or bite the bullet and take a loss so that he can keep his customers coming in until he gets a shipment of lower-priced gas. And by the way, the oil companies tend to cram in the gas when the price is falling and slow the shipments down when the price is rising, using their dealers as a kind of shock absorber. The dealer has little choice because in most cases the oil company owns or controls the land and the lease, and the station owner is really just the business owner and can be forced out on a whim.

So how about a law that says a certain number of randomly chosen consumers must fill up at the station that got the high-priced shipment just when prices started to fall so the owner doesn’t have to absorb the loss? Oh, you like the free enterprise system and want to go to the lower-priced station? See, everyone likes free enterprise when it benefits them.

Now, I know some of you are now rechanneling your rage and thinking, okay, so I’m not mad at the gas station owner, but those big oil companies are manipulating the market to make obscene profits. To which I would say, if the oil companies were so able to manipulate the market, why did they let prices fall to the record lows of the late Nineties when 70-cents-a-gallon gas was available? Was it all part of a plot to suck us in to big gas guzzlers so that six years later they could really tighten the screws?

Spoiled children and Ted Kaczynski

My father-in-law was in the business of providing another commodity, pulp to be turned into paper products. He told of years when it would have been cheaper to just give his customers a hundred dollars a ton not to order pulp from him because they just couldn’t charge enough to make money on it. But in order to stay in the game they had to provide the pulp, even at a loss. In the mid-Nineties pulp and paper prices went through the roof, allowing them to make really good profits, but just as quickly a lot of new Asian mills came on line to cash in on the new prosperity... and down went the prices again. Commodities are like that. They stay high or low too long, then move at a great leap and over-correct. We only notice it more with gasoline because most of us have to buy a good deal of it every week or two.

We use energy — lots of it — and it’s what makes our quality of life what it is. I’m not talking about a HUMMER in your driveway. I’m talking about the everyday things that make your life comfortable. I’m talking about air conditioning in the summer, heat in the winter, hot water on demand, refrigerators, computers, televisions, and videogames, and all the things that crowd every electric outlet in your house till you have to put the adapters in so that six or eight items connect to two plugs, including the computer I’m typing on. Using energy is good. The alternative is to have slaves, which we all decided is not a good or just system.

But Americans have behaved like spoiled children, unwilling to make any compromises for the energy we all use (unless you’re Ted Kaczynski). It’s nice if you have a Honda Civic instead of a Ford Excursion, but if you’re living like most Americans live you are still using a heck of a lot of energy, and the guy with the HUMMER isn’t using that much more. Only 40 percent of our oil imports go for gasoline. The rest is going for other products, mostly for electrical power generation!

We have enough coal to last on the order of a thousand years, yet since the Seventies, we have been forcing power generators to shut down coal-fired generators and compete for both oil and natural gas supplies at the same time, making (through environmental laws) the act of exploring for, recovering, and refining new oil impossible — and then we complain about being dependent on foreign oil. I for one do not blame the Saudis for charging every penny they can get for their oil. After all, we are quite willing to see the pristine deserts of Saudi Arabia torn up but won’t open our Alaskan Wildlife Wasteland for oil exploration. We’re just not serious.

Doug’s plan

First, do no harm. Better to be able to buy gas at $3.50 a gallon than not be able to buy it at $2.50 a gallon. Stow any talk or thoughts of price controls or, heaven forbid, government involvement in distribution. Been there, done that; No Thank You, Jimmy Carter.

Second, begin having a realistic debate on how much energy we use and where to get it. Shatter the illusion many of our citizens seem to have that they can live in a 7500-square-foot house with two cars and all the trimmings while demanding that energy come from stationary bicycles pedaled by polar bears. With each electric bill and natural gas bill that comes in the mail, provide the customer with an equivalency statement of how much energy they use in gallons of gasoline.

Third, since environmentalists have prevented any new drilling or refining in this country for 25 years or so, nothing can be done quickly to increase the supply of oil, but if we aggressively moved power generation back to coal, making it as clean as we can but accepting it won’t be as clean as we’d like, it would free up oil for gasoline production. Drill like hell anywhere we might be likely to find oil and stop the bottleneck on refining. Congress could easily do this by passing laws and exempting them from court review, which is their right by the way. Then the world will know we are serious and oil futures will drop on this knowledge alone. Oh, and no more tax breaks or subsidies for hybrid cars or ethanol fuels.

If you can’t make it in a $3.50 a gallon world you probably never will.

Doug Flint owns and operates Tune-Up Technology, a garage in Alexandria, Va.