Tuesday, 10 June 2008

Reducing car fuel prices

You may have seen the lovely "pyramid" e-mail doing the rounds, telling you:
For the rest of this year DON'T purchase ANY petrol from the two biggest
oil companies (which now are one), ESSO and BP.

If they are not selling any petrol, 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 Esso and BP petrol buyers. This is really simple to do!!

Sounds an excellent way to reduce the price of fuel, and perhaps almost anything else! However this doesn't stand up to much analysis.

Starting Point

As a starting point, we have this situation:
  • Petrol price around £1.20/litre
  • People buying petrol from their nearest or cheapest petrol station

Stage One complete

Assuming that car drivers in the UK boycott Esso and BP in their millions (perhaps chosing to run out of fuel rather than buy their petrol) we would, apparently, end up in this situation:

  • Very few people buying petrol from Esso or BP.
  • Normal petrol price £1.20/litre.
  • Price at Esso/BP reduced to 69p/litre to encourage people in.

So far so good, we've forced Esso/BP to reduce their petrol price. But we do have an awful lot of people who are now deliberately choosing to buy more expensive petrol than they could do.

The plan is that the other petrol stations will then reduce their prices to match Esso/BP. But of course there's no need for them to do so, as people are buying their petrol at the higher price already!

Stage Two complete

Anyway, assume that all petrol stations now charge 69p/litre. We all return to buying petrol at any garage. Guess what? The very next day all the garages will have put their prices back up again!

After all that effort, we have this situation:
  • Petrol price around £1.20/litre
  • People buying petrol from their nearest or cheapest petrol station

The Answer

What we are talking about is Market Forces, and they already work, assuming competition between petrol stations, to keep the price of petrol as low as is possible without making a loss (although I suspect supermarket stations do sell at a slight loss, to encourage people to shop for their food, clothing, etc. there too).

The only ways to reduce fuel prices in a Market economy are:

  • Reduce demand by getting everyone to buy less petrol and diesel.
  • Increase supply by finding a massive crude oil field with good quality and easy-to-extract oil in it. Or perhaps invade and take control of any countries that have (a) oil and (b) no nuclear weapons.

Even reducing tax would probably have little effect on prices, as the current situation shows that you can sell petrol and diesel at £1.30/litre without too much loss in business. A tax reduction would therefore result in increased profits for the oil companies.

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