"RG" wrote in message
m...

I am sure it would double quickly, but not for government reasons.

Large, public corporations are controlled by the stockholders. By
stockholders, I don't mean John Q. Public's personal investments, but by
major institutional investors managing big money market and retirement
accounts.
These investors are as much interested, or more so, in revenues and the
steady growth of .... than in the minor quarterly swings in profits.

If the segment of oil company's revenues that are derived from gasoline
sales suddenly dropped by one half, these investors would be screaming
for the revenue deficit to be made up immediatately. The big oil
companies cannot afford to lose confidence in the investment banking
community, and would raise prices to make up the revenue deficit.

So, switching to high mpg cars may make you feel good, and, if you
believe the world is about to run out of oil you could convince yourself
that you are doing some good, but if you think it's going to control the
price of a gallon of gas, you are really misguided.


Your logic is flawed, Richard. Just how flawed depends on whether you
believe the oil companies are guilty of collusion and anti-trust law or
whether you believe that free markets are at work. The oil companies have
no direct control of the price of crude, which is the primary driver of
the price of refined products such as gasoline. World markets set the
price of crude not the oil companies. Just as a meat processor doesn't
have any direct control of the price of beef or pork. As with any
commodity, current prices are set by current conditions of supply and
demand. Now it becomes reasonable to ask if supply is being tinkered
with. Reducing supply would be the most effective way of influencing
market prices. But if we're talking about crude, then OPEC is who you
want to look at as far as the ability to tinker with supply. That is done
through production quotas and limits. But OPEC and the oil companies are
not synonymous.

Now if you're talking about the supply of refined products, then that is
most certainly the oil companies rice bowl, assuming an adequate supply of
crude. But since it appears that all refining facilities are running at
capacity, it doesn't look like there's any effort to reduce supply by
running refineries at reduced volume. You could ask why the oil companies
haven't built any new refining facilities in the last 30 years, but I
suspect that has more to do with the difficulty of getting approval to
build such a facility than it does with the lack of desire to build one.

So, in your premise that demand for gas drops by half, I believe it is
unreasonable to think that the oil companies would be able to double
prices as a response. Your scenario implies that the demand for gasoline
is highly elastic. In reality, nothing could be further from the truth.
But high elasticity is the only thing that would allow for such a large
hypothetical reduction in demand. And if that were the case, then a
further doubling of price would only cause a further drop in the demand
for gas due to the highly elastic nature of the demand (in your
hypothetical world). This result is the exact the opposite of what the
oil companies desired, assuming they have that kind of pricing power,
which they don't. In a case of demand falling by half, prices would have
to drop as a result of what would now be excess capacity or supply.
Ultimately gasoline prices would reach equilibrium with the new realities
of supply and demand.

In today's reality, what you have is a product with a very inelastic and
increasing demand and with a limited and ultimately reducing supply. The
combination of these two is a natural recipe for high prices.


Fortunately for my family, I was a better engineer than an economist.
My theory came from the experience of selling a small, private company to a
large, public one and the dramatic change that took place in terms of
emphasis on quarterly - actually monthly revenue reporting.
It was quite an eye-opener.

RCE