Musn't Break the Chain

Failing to pass along chain letters is supposed to bring bad luck. I wouldn't want that, so I'll go ahead and post one I got today. Hopefully, the supernatural forces which punish chain-breakers will accept a blog post as the equivalent of ten e-mails (what is the exchange rate on such things?)

Begins the chain letter: "GAS WAR - an idea that WILL work"

This was originally sent by a retired Coca Cola executive. It came from one of his engineer buddies who retired from Halliburton. It's worth your consideration.

Join the resistance!!!! I hear we are going to hit close to $4.00 a gallon by next summer and it might go higher!! Want gasoline prices to come down?

We need to take some intelligent, united action. Phillip Hollsworth offered this good idea. This makes MUCH MORE SENSE than the "don't buy gas on a certain day" campaign that was going around last April or May! The oil companies just laughed at that because they knew we wouldn't continue to "hurt" ourselves by refusing to buy gas. It was more of an inconvenience to us than it was a problem for them.

BUT, whoever thought of this idea, has come up with a plan that can really work. Please read on and join with us! By now you're probably thinking gasoline priced at about $1.50 is super cheap. Me too! It is currently $2.79 for regular unleaded in my town. Now that the oil companies and the OPEC nations have conditioned us to think that the cost of a gallon of gas is CHEAP at $1.50 - $1.75, we need to take aggressive action to teach them that BUYERS control the marketplace..... not sellers. With the price of gasoline going up more each day, we consumers need to take action. The only way we are going to see the price of gas come down is if we hit someone in the pocketbook by not purchasing their gas! And, we can do that WITHOUT hurting ourselves.

How? Since we all rely on our cars, we can't just stop buying gas. But we CAN have an impact on gas prices if we all act together to force a price war.

Here's the idea:

For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies (which now are one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit.

But to have an impact, we need to reach literally millions of Exxon and Mobil gas buyers. It's really simple to do! Now, don't wimp out at this point.... keep reading and I'll explain how simple it is to reach millions of people.

I am sending this note to 30 people. If each of us sends it to at least ten more (30 x 10 = 300) ... and those 300 send it to at least ten more (300 x 10 = 3,000)...and so on, by the time the message reaches the sixth group of people, we will have reached over THREE MILLION consumers. If those three million get excited and pass this on to ten friends each, then 30 million people will have been contacted! If it goes one level further, you guessed it..... THREE HUNDRED MILLION PEOPLE!!!

Again, all you have to do is send this to 10 people. That's all.

How long would all that take? If each of us sends this e-mail out to ten more people within one day of receipt, all 300 MILLION people could conceivably be contacted within the next 8 days!!!

I'll bet you didn't think you and I had that much potential, did you?

Acting together we can make a difference. If this makes sense to you, please pass this message on. I suggest that we not buy from EXXON/MOBIL UNTIL THEY LOWER THEIR PRICES TO THE $1.30 RANGE AND KEEP THEM DOWN.

THIS CAN REALLY WORK. Anything is worth a try!!

My reply:

By boycotting ExxonMobil stations, two things happen. First is the intended effect: demand for gas at the ExxonMobil Stations goes down. The problem is that at the retail level, gas stations aren't the oligopolies you see in the extraction and refining industries. The gas stations aren't owned or managed by E/M. In fact, they're often small businesses who have contractual arrangements to the corporation to sell E/M gas, oil, and other products. Some of these businesses, in fact, don't even use the Exxon or Mobil logos, but instead are local chains of convenience stores using the local brand while selling gas from the E/M wholesaler because that wholesaler happened to offer the best contract.

Since they are thereafter required to buy from the E/M wholesaler in their region, while the wholesaler has no such exclusive dealing restriction, the retailers have no bargaining power whatsoever. The Tiger has *them* by the tail, if you will. Their normal operations are such that due to competition among retailers and collection of rents by wholesalers, retailers typically make no economic profits -- just enough accounting profit to cover the opportunity cost of their equity.

When demand is reduced at the local E/M retailers, prices and sales do, of course, drop. Their cost structures, however, remain unchanged. Marginal and average costs are just what they were before. In the short run, retailers may continue to operate at a loss, hoping the boycott will "blow over." They'll close shop, however, if the boycott is effective enough to drop prices below average variable cost (or, in other words, if their revenue doesn't even cover operating expenses). If the boycott continues long enough to affect long-run planning, they'll close then.

The retail station doesn't have the option of forcing the wholesaler to drop their prices. This is because of the second effect:

The chain-letter author didn't say anything about reducing consumption, just diverting it away from E/M. When consumers take their business elsewhere, it *increases* demand for gasoline at the other stations. As with the E/M retailers, retailers for the competition will have the same supply arrangements and cost structures as before the boycotts, so the effect of the demand increase will be to *RAISE* prices, as quantity sold increases and the marginal cost of supplying a gallon of gas at a now-more-busy location has higher opportunity costs (more cashiers, more congestion, more deliveries). The competition's wholesalers, to keep up with rising demand, will raise their wholesale prices to siphon the extra revenue away from the local retailer. They can do this because of their oligopoly power, exercised through their exclusive-dealing contracts with retailers.

To come up with the extra gas, the competitors could try to make more on their own, which would be very costly, as refineries are running very close to full capacity now. But there would be a cheaper solution. Since the refineries which formerly sold to E/M wholesalers are having a hard time moving their product, the competition's wholesalers could buy their gasoline from the refineries who traditionally sell to E/M wholesalers. The differences in the formulas (detergent additives, etc.), despite all the marketing to the contrary, are so minor it would take a professional chemist to tell the difference -- otherwise switching brands would wreck your engine.

All that's been accomplished in the "big picture" is that supply chains to E/M retailers have been diverted to the retailers to which the customers moved. This can happen because gasoline of a particular grade is a homogeneous commodity, hence, fungible.

Shuffling demand from one retailer to another accomplishes nothing. The only ways to reduce the price of gasoline are (1) antitrust action, which won't happen, or (2) REDUCE DEMAND.

The only financial effects from the boycott plan are that some local gasoline retailers, unfortunate enough to be flying the Exxon or Mobil brands, will be driven out of business. The reduced competition is likely to *RAISE* gas prices in the short-term, and have little-to-no effect in the long-term. The extra short-term revenues and profits will we collected by the refiners. As the refiners tend to be vertically integrated with (that is, owned by) the major oil companies, the big oil companies will make more money, not less (including ExxonMobil to the extent that they are able to dextrously work arrangements to divert their gas to other-branded wholesalers).

The local guys lose out, the big oil companies make more money. People get to feel like they're doing something, but they're playing right into the hands of the fat cats. This sounds like a plan cooked up by ... a guy from Halliburton.