Fuel prices affect the cost of car ownership, food, electricity, and just about everything that families spend money on.
Gas prices are constantly fluctuating from day to day, and in some cases, hour to hour. The uneven movement of gas prices and unpredictable expenditure on gas make it difficult for families to set their budget. To keep their personal finances in order, people monitor and predict gas prices almost every day.
Here are some of the facts and myths on average gas prices that consumers should know about:
Boycotting Big Oil
If you get e-mails about boycotting oil companies on certain days to pressure gas prices to come down, then you are certainly driving into a myth. The slim reasoning for this statement is, if people stop buying gas from big oil companies, they will be pressured to lower their prices which will force smaller oil companies to follow the lead of big companies.
Boycotting tactics are probably the most preposterous myth on average gas prices. The big imbalance in the supply-demand curve is heavily weighted on the demand side, and no amount of boycott can flip this imbalance. Even if a boycott is successful, prices at non-boycotted companies will likely go up because of increased demand at their pumps.
A more effective approach is for consumers to reduce their overall gas consumption and not just purchase from a different outlet.
Historical Gas Prices
Another myth on gas prices is that we are in the midst of an unusual series of price increases by historical standards. The period from June 2008 from June 2009 represents the steepest climb of gas prices in history.
While any sharp rise in prices will understandably shock many people, annual average gas prices have increased only less than 1 percent per year since 1981. The inflation adjusted prices show that the average gas prices are actually predictable in their price movements compared to other social needs such as education and health care. The cost of education increased by more than 350 percent, while the cost in health care increased by 10% since 1985.
Average Gas Price Increase During Summer And Holidays
Many believe that average gas prices rise during the summer and holidays where there is more demand for travel. For example, most car owners fill up before Memorial Day weekend only to find a sudden bump in prices at the pump.
While this is true and there are a lot of news sources during the holidays to back this up, people think that oil companies are taking advantage of the situation and manipulate the prices for windfall profits. The fact is gas prices have always moved based on supply and demand. Oil companies have a system based on the supply they have left and the predicted demand in the coming days. This seasonal variation of high gas prices starts on the days before the Memorial Day weekend, then stay constant until Independence Day when prices are likely to rise again.
There are times when a steep climb in gas prices discourages people to travel during the Memorial Day weekend. This is a direct effect on the purchasing decisions of people in the face of gas price fluctuations.
The Profits Of Big Oil Companies
Whenever there is a big increase in average gas prices, all attention is focused on big oil companies. Many assert that these companies make obscene profits, while the companies themselves are arguing that they barely make money. The fact is, the real score is somewhere in the middle.
To put it into perspective, oil companies are not necessarily the largest, most dominant companies in the world. Gross profit margins for oil companies are less compared to other industries like electrical equipment, computers and consumer electronics, banking, and beverages.
As much as oil itself is important, it is only a basic resource that helps produce other goods. For example, the skill to make oil products is not as complicated as the skill to make a desktop operating system. In this case, oil companies act as a utility for "dumb" pipelines. So it is understandable that their profits margins are not as large as people are making them out to be.
On the other hand, oil is a very valuable resource, so there is a perception that we are forced to buy from these companies on prices that they dictate, at least for the short term. That alone gives them the potential to make large profits. However, this is not a mere case of a company getting oil from the Middle East, and then charging you a premium to get the oil to you. These companies are competing internationally to improve their refining processes and keep oil prices competitive as much as possible.
High Gas Prices Hurt The Economy
High gas prices are believed to be one of the culprits for the recession. The modern economy has become so dependent on oil that an increase in average gas prices strains other industries' production cost.
This is true in the short run. Higher gas prices will cause economic dislocations, and companies that are heavily dependent on oil will have a hard time to make ends meet. However, oil is only a valuable as we make it out to be. European economies that are charging $9 per gallon provide incentive for people to buy and drive fuel efficient cars. High prices also provide incentives to develop oil-saving habits, which in effect push for better technologies such as hybrid and electric cars. High prices of oil should also force us to look for substitutes in forms of alternative energy, which will reduce dependence on foreign oil.
Oil dependence is the reason why the average prices of gas have always been a contentious topic. As we move away from oil dependence to alternative energies, we will hopefully find a more objective perspective that will help us focus on the facts rather than the assertions based on panic and misinformation.
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