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This topic comprises 6 pages: 1 2 3 4 5 6
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Author
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Topic: Gas prices and Stupid people!
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Lyle Romer
Phenomenal Film Handler
Posts: 1400
From: Davie, FL, USA
Registered: May 2002
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posted 04-28-2006 09:07 AM
Frank, it is because they are charging the amount based on what they will have to pay to refill the tank. It works the same in the other direction. When the futures drop, the price drops even though the gas in the tank was more expensive. Is that anti-gauging?
Think of it this way. You own a store that sells widgets. You paid $1 for each widget and want to make 10% profit. You need to keep 1000 widgets in stock to serve your customers. Currently you are charging $1.10 per widget. Now your supplier calls and says the price of widgets are going up to $1.50. If you sell your current stock at $1.10 that will give you $1100. Unfortunately, your next shipment is going to cost $1500. Now you can't afford to pay for the shipment because you're $400 in the hole. Instead you raise your price to $1.65 now so that you will have money in the bank after your next shipment.
Since you've done this every time the price goes up, it all evens out. In a way, operating this way keeps the cost down. Using the same example, if you waited until the shipment with the increased cost to raise the price, you'd have to borrow the shortfall from a bank so that you can take delivery. Now you will be paying interest on that loan until you can sell enough of the second shipment to pay it back. Since you are still targeting a 10% profit, you will have to raise the price further to cover the interest payments.
In a nutshell, it's not price gauging at all, it's cash flow management.
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Steve Guttag
We forgot the crackers Gromit!!!
Posts: 12814
From: Annapolis, MD
Registered: Dec 1999
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posted 04-28-2006 10:51 AM
Lyle is 95% right. In a free market place it is impossible to price gouge except in Monopolistic (or Oligopoly) situations. The couteraction to excessive profits in the market place is competition...the more that offer something, the tighter the competition on the lower cost to the consumer. If Exxon/Mobil were broken up, Likewise Amaco/BP...and on down the line...prices would be competed with more (probably not enough since the market is so huge for the number of gas providers).
In his widget example...the merchant is never loosing money. The company spent $1000 on the initial supply of widgets and will make $1100 when the last one is gone. Yes, they had to spend $1500 on the next shipment if they choose to stock another 1000 units but by the time they sell all of those, their total profit on the 2000 widgets sold are up to $600.
What was being forgot is that one had to spend seed money to begin with (that initial $1000). There will come a point when the company will get a return on their investment AND continue to sell widgets at the 1000 unit rate/time period.
All of that said, a merchant will sell at "market value" all of their products regardless of what they paid for them.
Lets say I own store "B" and store "A" above went out of business because they were selling widgets at too low a profit. I buy their stock of widgets at .25-cents on the dollar. Do I lower my price because I bought them for less? No. What I, the store owner pays, is none of the customer's concern, legally. Now if the customer has a feel for my cost of widgets, and they have choices, they may feel I charge too much and not buy from me (free market and all).
What has really not been working in our country (USA) for a long time, is the government's role on anti-trust. When monopolistic practices come into play, it throws the free-trade market out of whack...it creates artifical supply/demand changes which the free market operates on. It is a delicate balance though...too much competition will lower prices too much and also make the market unstable since no manufactuer or merchant can make sufficient profit to survive. One dirty little secret that most economists don't mention about the supply/demand charts is that taken to the end of the time specturm, you end up with mere subsistance level living...every time. That is not what most Americans are used to living.
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Mike Blakesley
Film God
Posts: 12767
From: Forsyth, Montana
Registered: Jun 99
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posted 08-09-2006 07:27 PM
quote: Greg Mueller
When they hear of an excuse to raise their prices, they IMMEDIATELY raise the price on their EXISTING inventory. Yes they charge more for new stock, but they also charge more for existing stock. That's gouging.
No it's not!
There is NEVER any guarantee that the price of gas or widgets won't go DOWN again. Let's say a gas station had 10,000 gallons in the ground, that he paid $3 for and is selling for $3.05. If gas suddenly dropped to $2.00 wholesale, do you think the station owner would say "Tough cookies, folks...I am not going to lose a buck a gallon! I'm hanging in there at $3.05 until all this gas is gone?" NO, he's going to drop his price to $2.05 like everyone else. He will lose money on what he bought before, but he'll have enough to buy new inventory.
If retail worked strictly by pricing according to what stuff cost to buy, most businesses would eventually fail. You must always price a product based on what it costs to replace it.
"Gouging" would be if there were only two gas stations in town, and one burned down, and the other one doubled his gas price to cash in.
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David Stambaugh
Film God
Posts: 4021
From: Eugene, Oregon
Registered: Jan 2002
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posted 08-09-2006 08:54 PM
The big 3 oil companies earn around 8% profit after all expenses etc. The average for the industry is 7%. As a percentage, that's not very high. Any bad business decision, or freak act of nature, or forgetting to inspect your pipes, and that profit can be easily wiped out. There's not a lot of margin for error. Most businesses with profit margins that thin are not considered to be doing all that great.
Now if you just look at the pure numbers, 8% profit on sales of 5 trillion dollars is 4 billion dollars. Wow, they made $4B profit! Let's reign in those bastards. So let's see, how low can we force oil companies to reduce the price of gas at the retail level and still allow them to show a reasonable profit. Probably not as much as we would like to think. And what is a reasonable profit anyway?
OMG, I can't believe I'm defending Big Oil. ![[uhoh]](graemlins/uhoh.gif)
Besides, gas needs to be MORE expensive, not less. ![[Big Grin]](biggrin.gif)
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