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"Gas Has Gotten So Expensive, We Can't Afford To Sell It!"

I'm no economist, I've never run a business, but I do have a certain amount of common sense (as long as it doesn't affect me directly) and a damned good head for numbers. And that is why I could see this one coming a long time ago:

Here's a scenario. You sell a certain item. You are contractually limited to sell it at a certain fixed markup from your supplier -- a hard number. On the other hand, your credit-card processor charges a certain percentage of each and every credit card sale you make.

Now, the price of your product is skyrocketing. You are still charging that same amount of markup, so your profits don't increase in the least. Indeed, they take a hit, as people are buying less of your product. At the same time, the credit card company's fees go higher and higher, as your actual sales -- in dollars -- are going up.

At some point, you will reach the point where you are actually losing money on each sale. This despite the record high prices of your product.

Enough abstract stuff. Let's plug some real numbers into the equation.

You sell gasoline, and gas prices are at record highs. But your supplier says you can't mark up the gas more than eight cents a gallon. So every gallon you sell, you make exactly eight cents, no matter what you pay for it.

At the same time, your credit card company takes, say, two percent of every sale they process for you. If it's a dollar, two cents. If it's twenty dollars, forty cents.

When your supplier sells you gas for $3.92 a gallon, you have to turn around and sell it for $4.00 a gallon. That's in your contract. You charge anything else, they can cut you off.

Now, at $4.00 a gallon, what's the credit card company's take? Why, eight cents. The eight cents that was your profit on the gas.

Congratulations. You're not making a single fraction of a cent on that sale. You're dead even.

Now, say your supplier raises his prices to $3.93 a gallon. You're now selling gas for $4.01. And the credit card company is taking 8.02 cents out of your 8 cents profit. You are now paying people to buy your gas. And the higher the price goes, the more money you lose on every single gallon.

Sounds terrible, right? But that's just fantasy, just an abstract exercise, right? A cautionary tale of what might happen?

Nope. It's real.

There are several possible solutions here. They all boil down to changing one of the portions of the equation:

  1. The price of the gas the dealer buys.
  2. The allowable markup the dealer can charge.
  3. The percentage of the sale the credit card company takes.

In reverse order:

3) Ain't likely to happen. The credit card processing companies have a workable, profitable, sustainable business model. In the big picture, the amount of their revenues that comes from gas purchases is negligible. And if they carve out an exception for them, then they can count on a lot of their bigger customers coming to them for the same kind of deal.

2) This one might happen. But it's a case of "the cure being at least as bad as the disease," or "the operation was a success, but the patient died." Suppose the dealers get to renegotiate their deal with their vendors, and change it to a percentage. The end result will be higher gas prices for the customers.

So, how about #1?

If you listen to the Democrats, the solution is to tax the oil companies more. This is typical of them -- they want to do what their emotions tell them to do, and since all feelings are valid, that's OK. The oil companies are making lots of money while we're paying more and more, so let's soak them with a "windfall profits tax."

Sounds good, unless you actually think. Then you remember that the last time we tried it, the main consequence was a gas shortage.

And if you want to really have some fun, ask one of those "screw the oil companies" folks how jacking up the taxes on them will lead to lower gas prices. They won't answer, because they can't -- it's not about finding a solution, it's about petty revenge.

No, the problem with gas is one of the most fundamental principles of economics -- one even I can understand. Supply and demand.

Right now, there is a steadily rising demand for oil in the world. That means, even if the supply stays steady, the price will increase. That is non-negotiable.

So to change the equation, there are two elements to play with: supply and demand.

We're already doing a bit about the demand end. People are moving away from big, gas-guzzling vehicles and moving into more efficient vehicles. (And, amazingly enough, they are doing it a hell of a lot faster on their own, without the government and its stupid "CAFE" fuel mileage standards would make it happen. Will you look at that -- it's almost like the free market works, and works far more efficiently than government regulation!) They are also driving a lot less.

Another approach would be to cut the demand by using substitutes for oil. A lot of our oil goes into energy production. If we actually started working on alternate forms of energy, that would also help.

That's where we run into the "no nukes" crowd, the "don't put a windmill where it might clutter up my beachfront mansion view" crowd, the "don't dam up the river because you might irritate this ugly fish" crowd, and so on. It's long past time to tell them to shut the hell up and get out of the way of civilization.

Of course, that's only a tiny part of demand. The rest of the world wants more and more oil, too. India and China are both increasing their consumption, just to name two, and they are soaking up more and more of the world's oil supply.

So, how about increasing the supply of oil?

We can't do THAT!

Nah. Better to let other countries sell us the oil. Let THEM pollute their land and seas, let THEM gut their territory, and let THEM keep their noose around our necks.

We have tremendous oil reserves of our own, but we simply won't let ourselves develop them. We're told that it's too risky to the environment, and it will take years and years to see any real benefit from them.

Well, the environment is going to get "endangered" anyway. The real question is, "do we want the Nigerians, for example, to utterly trash theirs, with their less advanced techniques and lack of environmental watchdogs, or would we rather have it done here in the US, under our scrutiny, using the latest and best technoloogy to keep it as clean as possible?"

Another real question: "Do we want to continue giving other nations this much power over not only our economy, but our whole way of life?"

And a third real question: "Yes, we won't see any real benefits from this for five years, if you don't count all the jobs created in the process of getting these new oil sources online. But guess what? Five years from now, we are almost guaranteed to be in just as rough shape as we are today, if not worse, so why not get started today on not letting that happen?"

I don't know why I ask these questions; I already know the answer.

"But... but... Big Oil is making obscene profits! We need to punish them!"

I'm sure that, somehow, in some bizarro universe, screwing over Big Oil will make things better for all of us. But I just don't see it.


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Comments (25)

Jay, you haven't been payin... (Below threshold)
Mike:

Jay, you haven't been paying attention have you?

All we need to do is nationalize our oil refineries. Then all our problems will magically disappear, because the government always knows what's best for everyone, not just "Big Oil."

The 1st 'industry' we shou... (Below threshold)
GianniD:

The 1st 'industry' we should levy windfall profit taxes on is the legal industry.

To take 30-40% of an 'award' is outright theft, IMO.

Might as well head to Hollywood next, and mandate no one can make more than 10% off of the cost of a movie, tv show, cd, etc. Then we need to go after beverage companies, water, beer, soda, liquor, etc, because 10% profit should be way more than enough. Lastly, lets mandate that all politicians only get 10% of the median income in their district, per month. If your area's median income is say, $50K, great, you get $5k a month and the standard benefits. No pension, no lifetime bennies, NOTHING else.

See where govt controls can lead us???????


A few good points...but how... (Below threshold)

A few good points...but how many times did you walk away and come back to this post, Jay? I feel a little sick to my stomach after trying to follow it :) Every time I cut off a head and got to a 'point' two more grew up in its place.

Anybody see the news that China, which heavily subsidizes the price of gas, it going to raise gas and diesel prices 18%? Wonder what that will do to demand there...

If I owned a gas station, I... (Below threshold)
Dave A.:

If I owned a gas station, I'd raise the price to cover the credit card fees, but then offer a comparably big discount for cash purchases.

GianniD,If you do ... (Below threshold)
BPG:

GianniD,

If you do the politician's mandate first, the others will happen far faster.

After all, if we're gonna do it, lets DO IT.

I'm with Mike. Let's socia... (Below threshold)
kevino:

I'm with Mike. Let's socialize the oil refinery business. With government involved there won't be any gasoline to sell. And the country will reduce its dependence on foreign oil, because we won't have any use for it. And the country will reduce its carbon footprint - big time.

In fact, let's let government fix the price of gasoline at the pump, too - for as long as there is gasoline.

If the majority of the electorate is stupid enough to embrace socialism, then let's give it to them. Our country needs an education. This is a great way to do that.

Great post Jay. T... (Below threshold)
Mattnu:

Great post Jay.

The independent gas station a couple of blocks from my home has stopped selling gas exactly because of the situation you describe. Even though they don't have a franchise that tells them how much they can sell for, they know what the market will bear. Combine the ever escalating price of a tanker of gas (around 32K when they stopped buying gas) and escalating processing costs and fees and they couldn't afford to sell gas. They will keep the convenience store open and the auto repair, but have shut off the pumps. 4 people lost their jobs by the way. Another major-brand gas station didn't renew their franchise because of the fixed cost aspect of their contract. They are an independent now and not struggling as bad as previous but times are tight for them too.

Hey, <a href="http://uk.reu... (Below threshold)
hyperbolist:

Hey, a company in Japan just released a prototype of a car that runs on WATER. 80 kilometres on a litre @ 80 km/h! It also takes tea!

If any of the Big Stupid 3 automakers had any sense (and they clearly do not), they would mortgage what's left of their bleak future to acquire this fledgling company. Of course they won't, and will instead prepare a litany of frivolous reasons for their lobbyists to present to Congress explaining why a car that uses no fuel and creates no emissions is somehow not in the interests of the typical American commuter.

Don't forget that Federal a... (Below threshold)
stevenb:

Don't forget that Federal and State taxes average about 47 cents per gallon. Here in CA we pay the 18.4 cpg Federal tax, 18 cpg State tax, PLUS 6% state sales tax PLUS 1.25% County tax PLUS 1.2 cpg UST (underground storage "fee").

The government is doing just fine raking in taxes and fees, particularly the taxes or fees that are pegged as a % rather than a cpg.

hyperbolist,<a hre... (Below threshold)
Sheik Yur Bouty:

hyperbolist,

http://www.autobloggreen.com/2008/06/15/is-genepax-for-real-a-car-that-runs-on-water-highly-unlikely/

As one of the commenters to that article said "But wait - why stop at cars??
Why not build a 10 mile wide 200 foot high Genepax power station and power an entire nation - or the whole planet."

You really, really want to believe its true, but don't hold your breath.

Jay, you left out one produ... (Below threshold)
Stan25:

Jay, you left out one product that will help reduce the consumption of oil--coal. Why coal you may ask? Coal is cheap and plentiful out here in the Western United States, particularly the Rocky Mountain region. The coal out here is the low sulfur kind, that does not put any sulfur dioxide into the atmosphere and with the scrubbers that are used on the existing coal fired plants, the little bit that is given off is caught and filtered out. The amount of BTU that are generated to make the steam that runs the turbines are way more efficient and way cleaner than a barrel of oil would ever be.

I know that some of the eco-terrorists say that the emissions from these plants are creating a lot of the so-called greenhouse effect gases. My question is; how the hell can the steam that is emitted from the smokestacks of these plants have any co2 in it? According to the science that I studied in primary and secondary schools, steam is heated water, not hydrocarbons. So if we build more coal fired plants, just think about how many barrels of oil that can be used elsewhere.

hyperbolist - you keep drea... (Below threshold)
marc:

hyperbolist - you keep dreamin' that dream, that one along with the 300mpg carburetor.

Meanwhile back in the real world

1. Hynor- In Norway

2. Hydrogen Sweden.

3. Nordic Transportation Network

Hey, a company in ... (Below threshold)
Mac Lorry:
Hey, a company in Japan just released a prototype of a car that runs on WATER.

And now some reality Water Cars Create False Hopes and Real Apathy

Of course ALL of us can jus... (Below threshold)
hermie:

Of course ALL of us can just dump our cars at any time and buy a hybrid or a 'hydro' car. We can all magically convert each truck, train, ship, farm tractor, school bus, etc overnight.

I started pumping gas at my... (Below threshold)
Roy Lofquist Author Profile Page:

I started pumping gas at my father's station in 1953. Price? 19.9 cents a gallon. My mother did the books. We lost money on gasoline. The profit was in TBA (tires, batteries and accessories) and the lube bay. Nowadays, because of specialty services, gas stations have to lose money on gas to draw business to their convenience stores. They survive only because people are willing to pay more for bottled water than gasoline.

Neal, my local owner, showed me the invoice for his last delivery. He was selling the stuff for two cents less a gallon than he paid. This does not take into account rent, electricity to run the pumps or various environmental fees.

This is why Exxon/Mobil is getting out of the retail business. Talk about jobs Americans won't do? It seems that only immigrants are willing to put in the backbreaking long hours to make a dream for their children. Same thing for motels. About every tenth motel along US1 here in central Florida advertises "American Owned". There used to be more.

kevino:You assume ... (Below threshold)

kevino:

You assume the majority of the electorate is smart enough to learn something out of giving them socialism. I admire your optimism, but if the electorate is dumb enough to vote for socialism, I assume they're not smart enough to learn why it's a bad idea during the experience. ;-)

Why would I want a car that... (Below threshold)
Faith+1:

Why would I want a car that runs on water? Water is already short in some areas and is significantly costlier than gas and/oil.

Oh you mean the "cheap" water we get out of the tap? Ahhh, ok.....and I predict that as soon as it's found to be useful your water utility company will jack the price up to around, I dunno, 4 or 5 bucks a gallon...

Yeah, but that bad boy, wha... (Below threshold)
hyperbolist:

Yeah, but that bad boy, whatever is in that generator, runs on tea/sea water/tap water/probably urine. Obviously this thing is of little interest so long as we have no idea what the hell the battery-thingie is, but if it's sustainable, renewable, and will go two klicks on as much water as can be wrung from a face cloth, then this has to be worth a second thought.

Also, fuck OPEC.

Jay, you are right about wo... (Below threshold)
Rob Freedom:

Jay, you are right about world wide supply and demand ratcheting up gas prices. But there is more to it than that.

The massive decline in the dollar due to economic mismanagement has also decreased our purchasing power, so we pay more dollars for the same amount of oil. We now pay more dollars for everything. Never mind gov data on inflation, what do you see? The costs for everything is increasing. High oil prices are also adding big time to inflation. Everything moves on trucks that run on $5.00/gallon diesal. Same with rail cars.

Price gouging by oil companies are also a big factor. If the oil companies were not price gouging, why then are they posting RECORD profits each quarter? Common sense tells us to look at where the money is.

So there are many factors. Oil is directly tied to our national security. High oil prices equal economic weakness. Economic weakness during a time when we are supposed to remain strong, and maintain our military against foreign threats, is a formula for disaster. And the Fed can do nothing. If they print more money, they just send the dollar further into decline. If they increase interest rates, they drive off foreign investment capitol.

How this administration could have let this mess unfold like this, is almost beyond comprehension.

And by the way, world wide orders for new nuke plants are up. There are many new plants on the drawing boards. Even enviromentalists are begining to see that nuclear power is clean in comparison to coal, efficient, and reliable. Alternative energy investment is on the increase, so your data concerning enviromentalists blocking EVERYTHING, is outdated.

Bush is a disaster.

From April 2006:"W... (Below threshold)
GianiD:

From April 2006:

"With skyrocketing gas prices, it is clear that the American people can no longer afford the Republican Rubber Stamp Congress and its failure to stand up to Republican big oil and gas company cronies. Americans this week are paying $2.91 a gallon on average for regular gasoline - 33 cents higher than last month, and double the price than when President Bush first came to office."

SO Dems have admitted the correltation between gas prices, and the Congressional party in power.

"With record gas prices, record CEO pay packages, and record oil company profits, Speaker Hastert and the Majority Congress continue to give the American people empty rhetoric rather than join Democrats who are working to lower gas prices now."

What exactly has Pelosi done since 02/01/07 to lower gas prices, when the avg price was about $2.10?

"Democrats have a commonsense plan to help bring down skyrocketing gas prices by cracking down on price gouging, rolling back the billions of dollars in taxpayer subsidies, tax breaks and royalty relief given to big oil and gas companies, and increasing production of alternative fuels."

SO Dems campaign on a promise to help the American people, yet, once in power, instead of helping, the actually help prices double? This economy has been crippled since Dems took over 17 months ago.


I agree, we need CHANGE, and I sure HOPE like hell we can somehow find about at least 50 conservative Senators over the next several years(57 if you count like Obama) to reign in spending and pork(chicken or goat if you are a Muslim politician from Illinois).

Rob Freedom and GianiD,... (Below threshold)
Mac Lorry:

Rob Freedom and GianiD,

You're falling for the same BS that got us into this problem in the first place. Yes, now that gas is $4 a gallon environmentalists and the Democrats who kowtow to them are backing off their no drill, no refineries, no nuclear plants position that's the primary cause of short energy supply. Yet, just last week Democrats were trying to pass a carbon cap and tax scheme in response to the environmentalists' global warming scam.

Oil is a world commodity with the price set by the consumers not the producers. Big oil companies selling their oil for the market price is not the cause of high oil prices. Taxing big oil only limits what new exploration and drilling they could do once Congress gets it's collective head out of it's collective ass and removes the ban on drilling. Republicans are the ones who have been trying remove such bans for years and years. More Democrats will only make matters worse, not better.

Biofuels are a fools errand. Politicians are finally starting to see the stupidity of turning food into fuel. Even using non-food biomass removes the land it's grown on from production of food. If congress wants to put a moratorium on something, biofuels should be it.

The way to get people out of low mileage vehicles without over taxing gas is to limit the max speed of gas guzzler cars, SUV's and pickup trucks to 50 or 55 MPH. Give them a red license plate so cops can spot them and force them to slow down. Even those with money to burn on gas don't want to be doing 55 when efficient vehicles are doing 65 to 75 MPH, yet if you need to haul or tow something you can do it, but at a slower speed. Real trucks (12,000 GW and over) would not be part of the scheme, so there's no impact on most hauling. The minimum mileage for full speed would be increased yearly for new vehicles. It wouldn't be long and large SUV's would be extinct and the only people driving pickup trucks would be farmers, businesses and those who really need to haul or tow a heavy load.

Who's a Muslim politician f... (Below threshold)
hyperbolist:

Who's a Muslim politician from Illinois, Giani? Ignorant cretin.

"That's where we run into t... (Below threshold)
anon:

"That's where we run into the "no nukes" crowd, the "don't put a windmill where it might clutter up my beachfront mansion view" crowd, the "don't dam up the river because you might irritate this ugly fish" crowd, and so on. It's long past time to tell them to shut the hell up and get out of the way of civilization."

While I agree that aesthetics and NIMBY should not interfere with placing windmills (that really aren't that bad looking to begin with), I cringed when I read the line about the fish.

I draw the line at causing the extinction of species in the quest for renewable energy. Ugly or not, the fish should not see their habitat destroyed when there are plenty of other less intrusive sources of energy. All alternative energy sources are not created equal, and we need to exercise some judgement in choosing which to use (see also: ethanol).

If you don't see the extinction of species as a matter for concern, you need to read more about the "missing" honeybees, for one example.

If you think the ethanol debacle is hurting you through high food prices, wait to see what happens when crop yields drop greatly because nothing is pollenating the plants. $4 gas will seem like nothing compared to that $20 orange you're eating. Back to the days of my grandparents, when a bowl of fruit on your table indicated wealth.

I dont know if Osama is an ... (Below threshold)
GianiD:

I dont know if Osama is an ignorant cretin, and I also dont know if he has a Kenyan birth certificate. Like Kerry's military records, its a secret!

What I do know is that virtually everyone that has any power or influence in his life has a very checkered or corrupt past. What I do know is the man is an idiot(57 states?), a liar(see campaign financing link above), an ineffective politician (present???) and, worst of all, the most liberal politician(marxist?) in our nation.

The last part of your descr... (Below threshold)

The last part of your description is the short term thinking that Robert Heinlein described as "If it's not raining, my roof don't leak, and if it is, I cain't fix it nohow".

But you are wrong about how credit cards charge, or at least you haven't gone into some crucial detail. They don't charge a percentage of credit card sales but a percentage of total sales, and they require the seller to offer the same price to credit card customers as to cash customers. This creates a "Tragedy of the Commons" situation pushing people into using credit cards and prevents the seller offering people competitive rates for cash purchases, rates that would still be profitable for him. It's not a free market, so no wonder cases can come up where it doesn't work out.




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