Wednesday, March 9, 2011

Greenpa's Rules of Real Economics.


Gee whiz, everybody is talking about the price of oil, the price of gas at the pump, and how we're all helpless in the hands of foreign oil producers.

Here's a comment I made over on the NYT Green Blogs

#1. When they tell you, "Sorry, but this is simply too complex for untrained people to understand." - they are lying. If you managed a B in 5th Grade addition and subtraction, you CAN understand it.

#2. When Joe Sixpack looks at the prices at the gas station, and says, "That just doesn't make sense." he is 100% correct, and he only got a C+ in 5th Grade.

#3. When Big Oil reports record profits - of billions - and they say "Look, we couldn't help it, these prices are set by the international markets-" they are lying.

#4 Could Big Oil cut the prices they charge the gas stations - and still make exactly the same profits they did last quarter? Why, yes, they could.

#5. But they don't.

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Of course, immediately after I hit the "post" button, a few more occurred to me...

#6. Does that mean Big Oil is ripping off the public - and they know it? Yes, it does.

#7. Does that mean Joe Sixpack's Aunt Ruth, the retired, pensionless, Kindergarten teacher, will finally go bankrupt, fail to pay her mortgage, become homeless, and die of exposure on the street? Yes, it does.

#8. Does that mean that when Aunt Ruth's bank can't sell her foreclosed house, loses money and gets sold to Bank of America for 10¢ on the dollar, and there is no one in town who will loan money to local businesses, some of them will have to close? Why, yes, it does.

#9. Wouldn't the Homeland Security Administration consider anyone causing such widespread economic damage as a threat to National Security, guilty of murder, and possibly guilty of Treason? Only if they're not a large multinational corporation.

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Ok, yes, I have this bad habit of thinking that something obvious to me is of course obvious to everyone. Yes, that makes me an idiot.

:-)

As first commenter Eric pointed out; maybe it's not instantly obvious. So here was my answer to him; this is the simple math:

Here's how! Remember - it's their PROFIT that is UP. Are they making ENOUGH profit already? They certainly said so in their last stockholder's letter. They make more, automatically, because they've rigged it so their profits are figured as a PERCENTAGE of the price. Price goes up; profits go up. Making the exact same profit wouldn't hurt them a tiny bit.

And- seriously - do businesses have an ethical responsibility to NOT HURT their customers? Every business ethics class in the world would say so. Are their customers being hurt? Ask them. Millions have had to quit marginal jobs because they can no longer afford the commute; I know some of them; some of them have had to quit working for me.

Here's the math (I'm making these numbers up):

Overhead costs $80/bbl. Profits are figured in automatically at, say 20% of that; $16, so cost at the pump is now $96/bbl.

Ok; so; the price goes to $100/bb. Now, the automatic profit margin is $20. Price at the pump; now $120/bbl. And their PROFITS just jumped from $16 to $20, on every barrel.

Exactly what did they do to EARN an increased profit? Not one damn thing. But they still take more money out of YOUR pocket; and put it into theirs.

Could they??? Gosh?? Just continue to harvest a profit of $16/barrel? Yes, the cost at the pump would still go up. To $116/bbl. Yes, it would still hurt me, and my workers; but just a little less. Maybe Aunt Martha could squeak by.

nah. why bother?

9 comments:

Eric Dobson said...

I did OK in 5th grade math, and this still doesn't make any sense to me. How could they charge less, and make the same profit?

At the end of the day, they charge exactly what people are willing to pay. It doesn't work any other way. Just because a business is extremely profitable doesn't mean they're ripping people off. Charging anything less than they could turns their business into a charity.

Greenpa said...

Eric - I'm afraid you're stuck in the mental tracks they have laid down for us.

Here's how!

Remember - it's their PROFIT that is UP.

Are they making ENOUGH profit already? They certainly said so in their last stockholder's letter.

They make more, automatically, because they've rigged it so their profits are figured as a PERCENTAGE of the price. Price goes up; profits go up.

Making the exact same profit wouldn't hurt them a tiny bit. And- seriously - do businesses have an ethical responsibility to NOT HURT their customers?

Every business ethics class in the world would say so.

Are their customers being hurt? Ask them. Millions have had to quit marginal jobs because they can no longer afford the commute; I know some of them; some of them have had to quit working for me.

here's the math (I'm making these numbers up):

Overhead costs $80/bbl. Profits are figured in automatically at, say 20% of that; $16, so cost at the pump is now $96/bbl.

Ok; so; the price goes to $100/bb. Now, the automatic profit margin is $20. Price at the pump; now $120/bbl.

And their PROFITS just jumped from $16 to $20, on every barrel.

Exactly what did they do to EARN an increased profit? Not one damn thing. But they still take more money out of YOUR pocket; and put it into theirs.

Could they??? Gosh?? Just continue to harvest a profit of $16/barrel? Yes, the cost at the pump would still go up. To $116/bbl. Yes, it would still hurt me, and my workers; but just a little less. Maybe Aunt Ruth could squeak by.

nah. why bother?

Eric Dobson said...

I see what you mean about a profit based on markup. It doesn't change the fact that they're running a business. Getting mad at a company for maximizing profits makes about as much sense as getting mad at the sky for being blue. Then again, capitalism has been shown to be the best we've got, though I'm certainly not trying to open up THAT can of worms if you don't agree.

A practical solution? I suppose a group of consumers could band together to start a nonprofit oil co-op, pooling their resources to act in the best interests of the group. It works with credit unions! Then again, that would be a great deal of work and require a great deal of investment... so perhaps we can just save ourselves the trouble and pay an extra... 20% or so.

In any case, I understand the frustration of seeing people suffer while others are bragging about how well they're doing. Such is life.

Thanks for taking the time to give such a detailed response. I'll definitely be considering the pros and cons of a percentage-based markup strategy.

Greenpa said...

Eric- no, we'd better not open that can of worms. :-)

But- I'll remind you, that even in the hard-core capitalist world, there IS such as thing as "excessive profit"; and "profiteering" - neither of which are looked on as ethical, or desirable by society. We also call it "price gouging" - and it's not only unethical, it's literally illegal; if you get caught.

Then there are ""windfall profits"- which tend to be subject to government confiscation- since everyone recognizes that they were unearned, undeserved, and excessive; and it's in society's interest that they should NOT go to the stockholders.

Take your pick- Big Oil can qualify for most of those categories- if someone in power wants to make the argument stick.

There is also a legal category named "unjust enrichment" also illegal. Trickier in this case, but- it could be argued.

AM said...

So here's the thing, our current system of capitalism isn't a force of nature or any such magical thing. It's a set of cultural practices and perspectives, which can we change because they are choices that people have made. Maximizing profits is not required, it's a choice. Here's a summary of a book that seems like it sheds a lot of light on this and many other assumptions baked into how we run our economy. http://www.alchemyofchange.net/divine_right_of_capital/chapter1/.

Anonymous said...

First- Big oil does not own the vast majority of gas stations where you buy gasoline; they are owned by independent business people who pay a fee to brand their station with the oil companies name. They buy their product from the big oil company at wholesale, but set the pump price themselves. Most gas stations make little to no profit on gasoline sales-- they make their money on service bays, coffee, etc.

Second - Most prices that big oil charges are based as a differential to trading on NYMEX/CME and other "Spot" markets. In this, the oil companies are not arbitrarily raising prices. Speculators who see geopolitical or natural situations constraining supply often buy up "futures" contracts to turn a quick lrge profit. This is the basis upon which big oil prices its product... and what really affects what you pay at the pump.

Big oil is not blameless, but the financial market has much more to do with prices these days.

Be careful about assuming how the entire Gasoline supply chain works-- it is more complicated than most people understand. (and no, I dont work for a big oil company although I do understand the market)

Chris said...

Eric,
In an ideal world, a business charges as much as the market will bear (what customers will pay), because 1) there are multiple choices in the market, 2) all players are equal and share all the information.

Economic theory looks at the world a lot like a kid's cartoon. In the real world, what choice do you have? If the price changes, how fast can you change your usage pattern? This is called elasticity, and gasoline is pretty inelastic for most of us. Is there another form of fast transportation available to you? It took many decades, but it was finally ruled in court that the oil and auto companies deliberately bought and destroyed most of the trolley and light rail in the USA to remove a competitor. Does it use another form of fuel than oil? Got enough capital to buy an electric car?

Capitalism is great, when it works properly. But not everyone wants it to work properly, some just want it to work their advantage.

Greenpa, how is SE MN Food network going? I am interested! Drop me a line; the inquiry form on the website is broken.

Greenpa said...

Anon 3:44: everything you say is correct, and fully understood by most folks here.

"Big oil is not blameless, but the financial market has much more to do with prices these days."

- uh, yeah; Big Oil isn't setting those prices- but they sure are setting their profit margins, and skimming more non-disposable billions out of the "real economy."

Chris - the SE MN Food network is doing ok; I think. :-) They ARE chronically short of people to answer phones and do website work- I'll see if I can dig up a phone number for you. May take a few days; check back here.

Dianna said...

We actually pay much less than most industrialized countries. We subsidize it by giving them tax breaks and paying for oil development. If we stopped subsiding it and put that money towards better development and public transportation we wouldn't have the poorly designed suburbia. We should tax it much more than we do and use it for smart growth planning and public transportation.

I actually think we pay too little in the US. rising gas prices will be the only thing that will affect most people's behavior and we do not pay the true cost of oil.