Monday, April 28, 2008

A Hard Habit to Break

Gasoline pumps are always covered with advertisements that take the unique advantage of a captive audience. Every pump seems to be covered with offers for every type of credit card provided by the oil company. I would imagine their effectiveness is better than ever since filling a car and paying cash these days would require carrying a suitcase of cash in your trunk. It is always amazing to see the enticements on these ads in large print and then read the fine print.

Today’s offer was a 10% discount on future gas purchases. The offer sounds fairly good. The ad offered an example of 29 cents per gallon savings on the price of $2.909 per gallon. That phrase alone speaks to the times as the pump price today was $3.459 per gallon. The fine print has all the details. The savings is limited to no more than 90 days and no more than $35.00 total savings. That won’t even fill your tank and isn’t really significant when you consider the current pricing.

Some of the big grocery store chains here in Tennessee feature gas stations that offer discounts based on groceries purchased. One offers 10 cents per gallon savings when you purchase $100 of groceries. Others at the big box stores offer discounts when using the store credit card. But the pump at the big box store offers gas mileage enhancing additives for additional costs. Does that mean these discount fuels don’t normally have the cleansing chemicals needed for today’s fuel injection engines? If so, what are we really saving?

The gasoline pricing crunch causes many of us to question who is pulling in the extra money. Some of us question the record profits at the oil companies, but is that really the root of the problem? The source of record profits can be attributed to the higher prices, but only because they draw a percentage of the profits. If you examine our oil refineries you may discover a smaller amount of income being invested in their capital base which could be distressing unless we are surely looking for an alternative fuel system. The lack of reinvestment does provide more funds for distribution to the stock holders, the ultimate goal of corporations.

Some people blame a supply and demand situation. I’m not sure fuel supplies have dwindled to the point of raising the prices to record levels. But it is evident that someone else is taking in a profit. While it always seems the prices go up faster than they go down, the independent gas station owners are not really the ones drawing the profits. Similar to theatres not making much money off admission prices, gas stations only reap a minor income from gas sales. Their goal is to lure you inside the stores where they actually make their profit on inside sales.

Maybe we have spoiled ourselves in thinking the open oil trade would never find its way into a mode of escalating profits based on our abundant utilization of fossil fuel. The profits can be found in the futures trading and the oil market. Our demand for endless supply at cheap prices only reassures the market’s ability to raise prices and continue to make incredible profits.

Most people have probably already thought of the other group collecting a windfall, or should be collecting a windfall. The taxes on gasoline are usually a percentage. In fact, most tax systems are based on percentages. As prices and income rises so do the amount taken in by the taxing authority. It makes me wonder why any government would ever demand a tax increase. The law of percentages only leads us to believe a mere increase in income for the workers would reflect in an increase in income for government. But I can’t claim to be an economics expert. I am simply an engineer who deals with scientific facts.

An overhaul of the entire world market is not possible and it seems the market systems we have in place are quite effective. The price increase is simply based on how the investors perceive the market and place value on the commodity. As such, our only choice for causing change is to decrease the demand for the product. The simplistic example of market supply and demand would imply prices might cease their rise. I am not sure they will ever fall to levels we have seen in the past no matter how much we trim our usage. Remember, if we trim usage then the percentage taken in by the various groups raking portions of the income will decrease. For example, the taxing authorities who have become engorged with the extra income will need to go on a cash diet. We all know how difficult that would be.

And so we attempt to throttle the economic disaster while we search for alternatives. Remember the butterfly effect? Everything we touch will come back to touch us again. A recent example was the use of corn in making ethanol. The reaction came back in a rise in food costs and a market scare on supply of grain as farmers switched their crops to the more profitable corn supply for fuel. The only answer for us is to continue our push away from dependence on fossil fuels. Doing so requires we demand the manufacture of alternatively fueled systems. After years of sitting on the sidelines, that method seems to be starting to take hold with hybrid vehicles. But that is only the beginning. In the end it is our adjustment to a different lifestyle that will relieve the pain. Like a child placing his finger on a hot stove we are learning the only way to stop the pain is to stop the action that causes the pain.

© 2008 Mark A. Daily