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Economics of prices {price-gouging oil companies}
JewishWorldReview.com ^ | May 31, 2006 | Walter Williams

Posted on 06/05/2006 8:43:21 AM PDT by thackney

Here's what one reader wrote: "Williams, I can understand how the destruction of Hurricane Katrina and Middle East political uncertainty can jack up gasoline prices. But it's price-gouging for the oil companies to raise the price of all the gasoline already bought and stored before the crisis." Several other readers made similar allegations. Such allegations reflect a misunderstanding of how prices are determined.

Let's start off with an example. Say you owned a small 10-pound inventory of coffee that you purchased for $3 a pound. Each week you'd sell me a pound for $3.25. Suppose a freeze in Brazil destroyed half of its coffee crop, causing the world price of coffee to immediately rise to $5 a pound. You still have coffee that you purchased before the jump in prices. When I stop by to buy another pound of coffee from you, how much will you charge me? I'm betting that you're going to charge me at least $5 a pound. Why? Because that's today's cost to replace your inventory.

Historical costs do not determine prices; what economists call opportunity costs do. Of course, you'd have every right not to be a "price-gouger" and continue to charge me $3.25 a pound. I'd buy your entire inventory and sell it at today's price of $5 a pound and make a killing.

If you were really enthusiastic about not being a "price-gouger," I'd have another proposition. You might own a house that you purchased for $55,000 in 1960 that you put on the market for a half-million dollars. I'd simply accuse you of price-gouging and demand that you sell me the house for what you paid for it, maybe adding on a bit for inflation since 1960.

(Excerpt) Read more at jewishworldreview.com ...


TOPICS: News/Current Events; US: Alaska
KEYWORDS: anwr; economics; energy; evilcapitalism; eviloilcompanies; fud; gouging; oil
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To: Cobra64
Dial 1-800-ENVIROMENTALIST and communicate your concerns.

Same put-down recycled. What should I dial next? 1-800-POLPOT? 1-800-STRAWMAN?
61 posted on 06/05/2006 1:55:40 PM PDT by mysterio
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To: Cobra64
There ARE a lot of intelligence-deprived people here.

Maybe you should leave them a really clever number to dial.
62 posted on 06/05/2006 1:58:17 PM PDT by mysterio
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Comment #63 Removed by Moderator

To: Rte66
it was a modification of my normal advice to the moaners ... "If you don't own an oil well, get one."

ROFLOL. I'll remember that one!

64 posted on 06/05/2006 1:59:13 PM PDT by Cobra64 (All we get are lame ideas from Republicans and lame criticism from dems about those lame ideas.)
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To: twm3

Absolutely. I conserve whenever and wherever I can. But conservation is not an energy policy, and we are still all forced to buy fuel. I just think it makes more sense to be energy independent. It's a win-win. Gas will have competition. And I think that's what many people on this thread don't want to see happen.


65 posted on 06/05/2006 2:03:23 PM PDT by mysterio
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To: Cobra64

Credit that to Mr. Eddie Chiles ("I'm mad, too, Eddie!") of The Western Company, circa late 1970s TV spots.


66 posted on 06/05/2006 2:06:00 PM PDT by Rte66
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To: spintreebob

It may or may not be price gouging. However, I would really love to know how the BP station down the street from me can jack up the pump price SEVENTEEN CENTS overnight. That's the biggest jump I've seen since Katrina hit. Someone please tell me how that's not gouging. Compare that to the Exxon station across the street that raised it's price five cents. I'm having a real hard time understanding how that's not gouging.


67 posted on 06/05/2006 2:07:16 PM PDT by NCC-1701 (RADICAL ISLAM IS A CULT. IT MUST BE ELIMINATED FROM THE FACE OF THE EARTH.)
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To: mysterio
Boy, you're the most enthusiastic of the stockbrokers I've met on here yet. lol.

Actually, I worked for a family-owned steel distribution service center for 15 years before I became a business analyst... Those pesky people who help private enterprises stay in business. Cost reduction, increased manufacturing efficiency ratios, and shortened cycle times from R&D to the market.

68 posted on 06/05/2006 2:14:23 PM PDT by Cobra64 (All we get are lame ideas from Republicans and lame criticism from dems about those lame ideas.)
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To: edzo4
Bingo! Thank you! I heard El Rushbo mention these figures, but did not have the source data to substantiate my discussions to the ever-present ignorant "doubting Thomases."

How about starting a new thread? Would the mods delete it? I don't know what their policies are.

69 posted on 06/05/2006 2:17:23 PM PDT by Cobra64 (All we get are lame ideas from Republicans and lame criticism from dems about those lame ideas.)
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To: mysterio
1-800-STRAWMAN

I think he died shortly after the Wizard of Oz film was completed.

70 posted on 06/05/2006 2:19:51 PM PDT by Cobra64 (All we get are lame ideas from Republicans and lame criticism from dems about those lame ideas.)
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Comment #71 Removed by Moderator

To: NCC-1701

Why don't you ask them? One is probably an independent owner who has to buy from whichever supplier he can that day - may not have a long-term contract, or may have just had one for cheaper gasoline expire on him and was unable to re-negotiate a better price.

FWIW, oil did go up $2 a barrel within the past few days for July delivery, so the station owner has to factor that in, looking ahead. The Exxon dealer may have a company-owned station or may be able to make more profit on the convenience store inventory inside so he can advertise his gasoline price as a loss-leader.

There are a lot of different factors to consider. Ask them!


72 posted on 06/05/2006 2:21:51 PM PDT by Rte66
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To: Cobra64

just start a new thread titled "goverment makes more from taxes than oil companies make in profits"

or something similar


73 posted on 06/05/2006 2:22:02 PM PDT by edzo4
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To: mysterio
While I agree with Williams' argument, I don't understand why the free marketeers always use the coffee, bottled water, or house strawman.

In my opinion, he is using examples that most people can understand to explain the fundementals of pricing. Despite the differences in the use of gasoline and those products they are not strawmen intended to deceive. They are simply easy to understand examples.

In fact, your post seems more of a lament about gasoline prices and free maketeers than the structure of the argument. Is it possible that your complaint is a strawman itself?

74 posted on 06/05/2006 2:22:55 PM PDT by Mind-numbed Robot (Not all that needs to be done, needs to be done by the government.)
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To: NCC-1701

All oil companies have stronger and weaker operational business units. Depending on their costs and operating efficiancy ratios in differing markets, prices rise and fall at different rates in different markets.


75 posted on 06/05/2006 2:25:00 PM PDT by Cobra64 (All we get are lame ideas from Republicans and lame criticism from dems about those lame ideas.)
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To: NCC-1701

They were probably caught with short tanks. If their tanks are less than half full raising the price to be able to afford to refill them requires a larger hike than if the tanks are mostly full. If their costs go up 5 cents a gallon and they only have half the stock to get that money with, and not enough in the war chest to make up the other half, then they have to drive their sale price up 10 cents. Life in retail when the vast majority of your sales are 1 product can be stressful, everybody in the gas business fears price spikes when the ground tanks are low.


76 posted on 06/05/2006 2:27:17 PM PDT by discostu (get on your feet and do the funky Alphonzo)
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To: edzo4

It is worse than that. I do not believe this takes into account taxes and royalties paid on crude oil. This appears to only be taxes on the finished product of gasoline. A lot more taxes were paid before that step.


77 posted on 06/05/2006 2:46:26 PM PDT by thackney (life is fragile, handle with prayer)
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To: mysterio
and we are still all forced to buy fuel

And food, and shelter, and clothes...

78 posted on 06/05/2006 2:47:46 PM PDT by thackney (life is fragile, handle with prayer)
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To: Cobra64

I have no problem with stockbrokers or business analysts. I want our country to achieve energy independence and give the oil based economy some real competition. And I'm really tired of watching constitutionally-questionable laws being passed in the guise of preventing terror when a lot of our energy money is going to that area of the world and into the hands of those who would destroy us. Seems the best anti-terror move would be to stop importing energy from the Middle East. Or at least to come up with a viable alternative and cut into their bottom line with some good competition.


79 posted on 06/05/2006 3:17:06 PM PDT by mysterio
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To: twm3

I am with you in support of nuclear energy. For us to be heating and lighting our houses off of natural gas is not the best way. Modern nuclear is efficient and safe. Of course, you are going to have to deal with the waste issue.


80 posted on 06/05/2006 3:19:10 PM PDT by mysterio
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