10/31/2005

11-1-05 - 2

11-1-05

As gas prices begin to stifle the economy in the US and drive up inflation to almost 4%, the oil companies rake in record profits. Refineries were out of commision in the gulf of mexico region, oil shipping ports were closed, offshore platforms shut down, Iraq is still not at full production, China is buying more and more of the world's oil, Venezuela has reduced delivery to US oil companies, and yet their profits continue to grow. Something is amiss. Indeed crude oil prices are higher, but there's not such a shortage that above-market prices are reasonable. In fact, in a working smooth capitalist system, the prices should rise roughly inversely with the reduce supply, so that total profit is about the same. If one oil company raised prices above that amount, the others should be able to lower prices and get more customers.

Part of why this isn't happening is because of the service station franchise model. The stations are separate companies which receive franchises from the parent oil company. As part of the franchise deal they are not allowed to set their own prices. Part of the reason is that the parent company doesn't want competition between service stations in the same town - eg. the Shell in one part of town trying to undercut another Shell, which could lead to a price war which would cut gas prices down to the minimal profitable level. They also don't want price wars going on across intersections, say if the Chevron across the street sells gas at 2.99 , I could just set my Shell to 2.98 and get more customers, but then the Chevron would go to 2.97 and we'd get in a war and wind up at the lowest profitable price again. In fact, some stations might sell gas at no profit, or even at a loss, in order to make their profit in the convenience quicky marts.

This doesn't happen also because the franchises are required to buy their gas only from the one supplier. They can't look at different suppliers and choose the one with the cheapest gas, so there's no price competition. There's no motivation really for the major oil companies to compete on price, because the service stations won't switch to their gas if it's lower price - they're locked in to a certain supplier.

http://www.thememoryhole.org/corp/gas-prices.htm http://releases.usnewswire.com/GetRelease.asp?id=28449 http://www.consumerwatchdog.org/energy/pr/?postId=5110

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