Collusion at the Gas Pump
- Alye
- Jul 31, 2016
- 3 min read
According to Select USA, “U.S. energy companies further transmit, distribute, and store energy through complex infrastructure networks that are supported by emerging products and services such as smart grid technologies. Growing consumer demand and world class innovation – combined with a competitive workforce and supply chain capable of building, installing, and servicing all energy technologies – make the United States the world’s most attractive market in the $6 trillion global energy market.” (Select USA, 2016)
The United States remains one of the major sources of growth and demand for oil and gas exploration/development. U.S. companies have developed techniques which have allowed many U.S. producers to remain competitive even with international crude oil prices, making the United States the world’s swing producer within demand/supply. (Select USA, 2016) “U.S. consumers have
experienced dramatic increases and wide fluctuations in gasoline prices over the past several years. During 2004 and 2005, U.S. consumers spent millions of dollars more on gasoline than they had anticipated. In the spring of 2005, the national weekly average price of gasoline at the pump, including taxes, rose as high as $2.28 per gallon. Since the mid-1990s, consumers on the West Coast, especially in California, have observed that their gasoline prices are usually higher than elsewhere in the U.S.” (Federal Trade Commission, 2005)
The domestic production has nearly doubled over the last several years, pushing out oil imports that need to find another home and causing a shift in the cost of crude oil by the barrel (as seen in the first reference photo). The reverse effect occurs when there is a tightening on the inventory and local supply of crude oil. The supply and demand of the market is affected by a few key players that are responsible for setting the price of gasoline. Crude oil prices (85% of the change in price of gasoline) are unfortunately not the only factors that go into determining the price for a consumer; making this market to appear being a part of an oligopoly. The industry is dominated by only a few players for competition which results in various forms of collusion (reduced competition and higher end prices for consumers). This oligopoly kinks the demand leaving the price greater than the marginal cost. The government has tried to enforce different legislation in order to protect against this gasoline collusion and to establish maximum prices for gasoline.
Gasoline prices rise due to production and supply with the demand of people wanting to buy. Prices will eventually begin to fall once they reach the price at which consumers stop buying; however,
these price surges are typically short-lived around holiday seasons when demand from consumers is high. Since 1982, gasoline has been a part of 49-53% of the daily petroleum products (such as diesel fuel, jet fuel, and heating oil). Federal laws and environmental regulations have changed the prices over the past 30 years; however, the long-run trend shows a significantly increased demand for crude oil (+1.5% average increase per year). Larger demand in oil has increased significantly from the predicted value in newly developing economies like those of China and India causing a shift in higher prices.
Overall, many factors affect the supply and demand of gasoline; however, the industry is run by a typical oligopolistic method; few competitors with controlled prices set for consumers. Gas companies have the ability to raise prices in advance to the spikes in demand leaving consumers to pay the ultimate price from the driven demand increase.