Friday, May 06, 2011

Gas Prices, Long Lines, Parachutes & Profits

Recently, from the New York Times:

"The crisis rolled on through the summer. Irrationality set in. All over the country, people wasted gallons of gas waiting in line for the gas they were afraid wouldn’t be there the next week. The crisis was the only news story anyone cared about. A protest outside Philadelphia turned violent. People stood guard beside their cars at night against thieves who siphoned out fuel."

From Atlas Shrugged:

“Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them….when money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips,and guns; or dollars.”

Recently, some clever bureucrats have gotten together to form a group known as the 'Oil and Gas Price Fraud Working Group.'

As quoted at the Knowledge Problem blog:

"And I would also note that one of the things the Attorney General task force will be looking at is coordinating with state attorneys general to make sure that we don’t have a what I’ve heard described as a “rockets-and-parachutes phenomenon,” where prices at the pump rocket up when oil prices rocket up, and yet they come down in a parachute fashion when oil prices go down. So we want to make sure that a drop in oil prices is appropriately reflected in a drop in gas prices at the pump."

Based on what I just read in the NYT above, I hope these guys don't take themselves too seriously. Of course, many people get upset about things like Exxon's recent profits reports, but as economist Mark Perry point's out at Carpe Diem, revenue from gas taxes (based on recent numbers) is almost 7 times Exxon's profit on a per gallon basis. (and we still have budget deficits).
It turns out, that consumer behavior in a competitive market (not greedy gas station owners, speculators, or oil companies) explains the "rockets and parachutes" phenomonon.

 'Rockets and Parachutes (or feathers) and research here:

Department of Economics
The Ohio State University
(forthcoming Summer 2011 Journal of Economics and Management Strategy)
"The model predicts that consumers search less when prices are falling. This reduced search results in higher profit margins and a slower price response to cost changes than when margins are low and prices are increasing."

and here:

"Contrary to public opinion and previous work suggesting that collusive behavior was the cause behind asymmetric pricing, this paper shows that it can well be the outcome of a competitive market"

Rockets and Feathers
Understanding Asymmetric Pricing
[Job Market Paper]
Mariano Tappata
January 2006
Other references:
That ’70s Energy Crisis

Published: April 30, 2011
The New York Times

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