Monday, April 10, 2006

Exxon Boycott Email - DO NOT BOYCOTT (here's why)

Here's the email that's been going around:

"This might be worth a try and it certainly won't hurt to test out this theory:
GAS WAR - an idea that WILL work

This was originally sent by a retired Coca Cola
executive It came from one of his engineer buddies
who retired from Halliburton. It's worth your
consideration.

Join the resistance!!!! I hear we are going to
hit
close to $ 4.00 a gallon by next summer and it might
go higher!! Want gasoline prices to come down? We
need to take some intelligent, united action.

Phillip Hollsworth offered this good idea. This makes
MUCH MORE SENSE than the "don't buy gas on a certain
day" campaign that was going around last April or May!
The oil companies just laughed at that because they
knew we wouldn't continue to "hurt" ourselves by
refusing to buy gas. It was more of an inconvenience
to us than it was a problem for them. BUT, whoever
thought of this idea, has come up with a plan that can
really work. Please read on and join with us!

By now you're probably thinking gasoline priced at
about $1.50 is super cheap. Me too! It is currently
$2.79 for regular unleaded in my town. Now that the
oil companies and the OPEC nations have conditioned us
to think that the cost of a gallon of gas is CHEAP at
$1.50 - $1.75, we need to
take aggressive action to
teach them that BUYERS control the marketplace..not
sellers. With the price of gasoline going up more each
day, we consumers need to take action. The only way we
are going to see the price of gas come down is if we
hit someone in the pocketbook by not purchasing their
gas! And, we can do that WITHOUT hurting ourselves.
How?

Since we all rely on our cars, we can't just stop
buying gas. But we CAN have an impact on gas prices if
we all act together to force a price war.

Here's the idea: For the rest of this year, DON'T
purchase ANY gasoline from the two biggest companies
(which now are one), EXXON and MOBIL. If they are not
selling any gas, they will be inclined to reduce their
prices. If they reduce their prices, the other
companies will have to follow suit. But to have an
impact, we need to reach literally millions of Exxon
and Mobil gas buyers. It's really simple to do! Now,
don't wimp
out on me at this point...keep reading and
I'll explain how simple it is to reach millions of
people!!

I am sending this note to 30 people. If each of us
send it to at least ten more (30 x 10 = 300) ... and
those 300 send it to at least ten more (300 x 10 =
3,000)...and so on, by the time the message reaches
the sixth group of people, we will have reached over
THREE MILLION consumers.

If those three million get excited and pass this on to
ten friends each, then 30 million people will have
been contacted! If it goes one level further, you
guessed it..... THREE HUNDRED MILLION PEOPLE!!!

Again, all you have to do is send this to 10 people.
That's all!
(If you don't understand how we can reach 300 million
and all you have to do is send this to 10 people....
Well, let's face it, you just aren't a mathematician.
But I am . so trust me on this one.) :-)

How long would all that take? If each of us sends
this
e-mail out to ten more people within one day of
receipt, all 300 MILLION people could conceivably be
contacted within the next 8 days!!! I'll bet you
didn't think you and I had that much potential, did
you! Acting together we can make a difference.

If this makes sense to you, please pass this message
on. I suggest that we not buy from EXXON/MOBIL UNTIL
THEY LOWER THEIR PRICES TO THE $1.30 RANGE AND KEEP
THEM DOWN. THIS CAN REALLY WORK.

Kerry Lyle, Director, Research Coordinator"


WHY THIS WILL NOT WORK:

When I first saw this email, I thought it made sense. Here's why I think it doesn't.

About a week after I first saw this email, I began to remember my antitrust law class. It was then that I realized that boycotting Exxon will actually give them an incentive to RAISE their prices rather than lower them. Everybody else will follow.

I know that this is counter-intuitive, especially to those who have not studied economics or antitrust. This is a simplified explanation of why it's true:

Exxon is presently the market leader (or so I will assume). Competitors want to be just a hair cheaper than Exxon - just enough that people might choose them over Exxon. This might be 5, 10, maybe even 20 cents/gal. Generally, you only see a difference of less than 5 cents between gas stations that are within a mile of each other (just based on personal observation). But, we can assume it is as large as maybe 20 cents.

If Exxon suddenly loses, say, 1/3 of its sales due to boycott, you would think that they'd lower prices to try to gain more sales (sell more gallons). You'd probably be wrong. Here is the conversation that Exxon will have with itself:

"We've got a target to hit for profits this quarter (or year). We have lost 1/3 of our buyers. We have to raise prices. But, if we raise prices, we'll lose even more sales, and it'll be so much easier for the competitors to undersell us, by a lot even. This would be a losing plan, right? Wrong. We're the market leader. Our competitors don't want to beat our prices by a lot. They want to beat our prices only so much as will make consumers choose them over us. So, the solution is to RAISE prices. We might sell fewer gallons, but we'll make more per gallon sold. Our competitors will follow suit by raising prices, because they only need to be competitive with us. If we go to 3.00 or 4.00/gal, they might follow behind by like 20 cents at most, but we'll be making even more profit."

This is by no means a comprehensive antitrust/economic analysis/prediction. But, it is a general sketch of how the market operates. Don't trust me. Trust your own experience with corporations. They're generally out to make as much money as possible. They are not constrained by morals. They are only constrained by the law (and only then when the law actually works).

This is why the free market does not operate to keep prices reasonable and competitive. It is because all the big players know that that's how everybody else thinks. If they overtly agreed to behave as such, it would clearly be illegal conduct. However, because they know how each other is going to act - based on their knowledge that the others are trying to maximize profits, regardless of morals - they do not have to overtly agree. The agreement is tacit. This is oligopolistic coordination, and for the most part is legal unless you can prove that some conspiracy exists. This is nearly impossible to prove.

Thus, gas needs to be a price-regulated industry. It does not matter that much when plasma tv makers engage in this type of behavior, because it is a luxury item. Gas, like it or not, is not a luxury. It is a necessity for today's society.

I don't know. Maybe it's good that prices are going up, and it's actually putting pressures on companies to develop more fuel efficient/independent machines. I'll leave that debate up to those more qualified.

All I'm saying is that if your goal is to LOWER gas prices, DO NOT BOYCOTT EXXON. Lobby your representatives for governmental control over gas prices, and elect representatives who are committed to this goal.

Thanks for reading. Your comments, criticisms and arguments are welcomed.

11 comments:

Rob and Danielle said...

So sad. I was getting all excited to drive past Exxon in hopes of fixing the world. Sometimes ignorance is bliss, Adam. Let me live in my world where gas is free and every half hour my boss provides snacks and entertaiment. ;-)

Eric Bergen said...

You're right, the gasoline boycotts do not work - but for another reason. Gasoline & oil is a commodity business. If consumers boycott Exxon & buy their gas somewhere else, Exxon will simply sell their extra inventory to another company at the market price! That's why the boycotts do not work. Also, less than 10% of the gas stations in the US are owned by these large oil companies. So the boycotts are hurting your local gas station owners, not the Big Boys.

TortfeasorG said...

eric,

great points! I am always appreciative of new insight into the oil biz.

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