Let’s Ask an Expert

Elementary physics meets elementary economics

June 23rd, 2007 – 10:56 AM by D.J. Tice

(Herewith, The Big Question launches a new, occasional series in which we’ll discuss questions of current interest, big and small, with the best experts we can find. Readers of the blog are invited to submit questions. We’ll take the most interesting ones to those who may have useful answers. — The Management)

tice.jpgA thought-provoking Associated Press story ran on the Star Tribune’s front page the other day (I’ve linked here to a somewhat fuller version of the piece that ran in the Tennessean).

The story deals with two sciences, ardent politicians and advocates, and self-interested industry spokesters.

A volitile combination, even if the subject weren’t gasoline.

The story describes a controversy concerning the way changinggaspump.jpg temperatures alter the effective price of gasoline. As temperature rises, gasoline expands; as temperature falls, gasoline contracts. Trouble is, in accordance with a venerable industry/regulatory standard, a “gallon” of gas is defined as a constant volume of fuel — 231 cubic inches — whatever the temperature.

The result is that when it’s hot outside, it takes less gas — less energy value — to fill that volume than it does when it’s colder.

The net effect, industry critics argue, is an artificial price hike on gasoline, particularly in warmer seasons of the year and warmer parts of the country.

The story describes all this as a matter of “elementary physics,” and I for one am prepared to take the reporter’s word for that part of it. Even elementary physics makes my head hurt.

But do the story and the industry critics have their elementary economics right?

I took my questions about this to Timothy Taylor, antim_taylor.jpg economics professor at Macalester College, and editor of The Journal of Economic Perspectives, an academic review published by the American Economic Association.

“You’re fundamentally right about it [an overall price advantage] being competed away,” he said in response to my inquiry. “You would think gas stations would be a pretty competitive market. It would be unusual to have a situation where every July they would make a lot of money and every December they wouldn’t.”

Think about it this way: If, whenever the weather gets warm, the effective price of gasoline increases, boosting a gas station’s profit margin on each gallon, wouldn’t the manager have a strong incentive to hold back on prices a little and try to corner more business?

That way, she’d make even more money, by selling more gas at what would still be an abnormally high profit, and by getting more customers in the door to buy coffee and doughnuts and beef jerky and car washes and other stuff she makes even better money on.

But of course every other station manager can add and subtract too. They’ll do the same thing, and pretty soon the artificial price hike won’t be just artificial but mostly non-existent.

If the gas industry were monolithic, it would benefit by simply pocketing the warm weather windfall. But because it’s made up of self-interested competitiors trying to pick one another’s pocket, it can’t do that.

The reason to have standardized weights and measure is to facilitate honest competition. You need to know that the “gallon” you buy from Tess’s Texaco for $2.99 is the same as the “gallon” Al’s Amoco is offering for $3.05. But as long as Tess and Al are using the same standard, it doesn’t matter much that a December “gallon” is a little different from a July “gallon,” or that a “gallon” in Shreveport isn’t exactly the same as a “gallon” in Shoreview.

Taylor notes that there are many variations in the value of things that don’t result in price changes. Movie theaters tend to charge the same admission for films whether they’re popular or not, he says, and restaurant meals generally cost the same at the busy dinner hour as at times when the restaurant is empty.

“It’s simply easier to communicate what the price is if it’s not moving around all the time,” he says. He speculates that if the nominal price of gasoline dropped every afternoon as the termperature rose, it would be “vastly unpopular” with people who have to buy gas in the morning.

(In some situations where variations in value are really profound, prices do change, of course. The same hotel room costs a lot more in the peak season than in the off season.)

But “there are lots of variations we take for granted,” Taylor says. “I don’t know why this is the one we should focus on.” He doesn’t think much of “this notion that gas should be priced according to energy value rather than supply and demand.”

All that said, Taylor advises that concerned motorists can readily turn the laws of physics to their advantage. “Anybody with half a brain figured this out in high school,” he says. “I buy gas first thing in the morning and get more gas for my money.”

14 Responses to "

Let’s Ask an Expert

Elementary physics meets elementary economics"

Bill Prendergast says:

June 23rd, 2007 at 11:35 am

“Movie theaters tend to charge the same admission for films whether they’re popular or not, he says, and restaurant meals generally cost the same at the busy dinner hour as at times when the restaurant is empty.”

No, dey don’t. You gotta bargain matinee at da movie theaters during da day when attendance is low, and den dey got da early bird specials at da restaurants. And dey give seniors a price break at da restaurants and movies, too. Where does dis economist guy live, dat he don’t know that? I guess da skyrocketing price of gas is keepin’ him from going to da movies or out ta dinner.

Anyway–as long as we’re on physics, I gotta question for you guys. How can Dick Cheney, a human being occupying the same mass and volume, be both above the law, and at the same time outside that law?

“White House Defends Cheney’s Refusal of Oversight

By Peter Baker
Washington Post Staff Writer
Saturday, June 23, 2007; Page A02

The White House defended Vice President Cheney yesterday in a dispute over his office’s refusal to comply with an executive order regulating the handling of classified information as Democrats and other critics assailed him for disregarding rules that others follow.

White House spokeswoman Dana Perino said Cheney is not obligated to submit to oversight by an office that safeguards classified information, as other members and parts of the executive branch are. Cheney’s office has contended that it does not have to comply because the vice president serves as president of the Senate, which means that his office is not an “entity within the executive branch.”

Isn’t what Cheney is arguing physically impossible? As vice-president, is he in another constitutional dimension (as he claims)–or does he have to be accountable under some law, somewhere, like the rest of us? Or is it like your gallon of gas thing, where he is “smaller” in the cool of the morning (ie, and therefore subject to the law) and “bigger” (and therefore not subject to the laws of the land) in the hot weather?

D.J. Tice says:

June 23rd, 2007 at 12:28 pm

Your point is well taken, Bill, about price variations for peak hours and other factors being fairly common. The reason I offered the aside about peak season hotel rates was that I share your sense that this particular argument overlooks some things.

We’ll consider your suggestion to seek expert response to the Cheney claim.

Bill Prendergast says:

June 23rd, 2007 at 12:43 pm

You know, while your reading this, Mr. Tice–thanks for the quick content changes on the Big Q and starting to use Eric Black’s “consult the expert” thing to flesh out the pieces. I guess I notice a slight “drift to the right” in the topics covered–are you abandoning “the experiment” about having “the liberal v. the conservative” perspective on the news, or are you going to “go up against another liberal” in the near future?

Anyway, back on topic: I think we’re sitting on a hell of lawsuit here, one that could profit the state and help to keep gas prices lower. It shouldn’t be to hard for the state’s AG could come up with a theory under which the oil companies could be sued (through the chain of distribution)–for selling less gas for the very same price (your “physics of gasoline” argument.)

It could be big, BIG money, like the state’s tobacco lawsuit, and fill the state coffers. If it’s workable, we could use the settlement from oil to build more roads, rails, infrastructure without tax hikes to the voters–that would be something. I know TP and the GOP don’t object to accepting lawsuit damages and spending them, to avoid tax hikes.

I think I’ll drop a line to Lori Swanson and Mike Ciresi, attach your piece and put a flea in their ear. If it turns out to be something–what a coup for the Strib and the Big Q!

John E Iacono says:

June 23rd, 2007 at 4:11 pm

Sorry, Bill: both you and your expert blew it this time.

It is a matter of simple physics:

The gas you buy is pumped from tanks IN THE GROUND, not on the surface. And everyone knows that if you go a few feet underground the temperature is pretty stable — in the fifties. That’s the principle on which heat pumps work.

Once you put it in your tank, it will warm up, of course, and do it’s expanding there, which is why you should not fill your tank beyond the first time it clicks: you want to leave the planned air space there to absorb that expansion without flooding the filters in the tank and overflowing dangerously onto the ground.

But the gas was at a stable temp when it went through the meter on the pump, so you got about the same btu value at whatever time of year. If you doubt it, touch the end of the hose after filling up and see how cool it is.

John E Iacono says:

June 23rd, 2007 at 4:18 pm

PS:

I do have some sympathy for the station owner, though: When the gas is pumped from the truck to his tank on a hot day, it has had a while to warm up in the truck, and HE has to absorb the shrinkage when it cools in his tanks. As in “Buy 10,000 gallons, which will sell as 9,900 gallons” (depending on the temp and time in the truck at delivery).

Cash N. Carey says:

June 23rd, 2007 at 4:26 pm

John – you beat me to it! I guess that is why these folks didn’t go into the technology biz. One clarification – you should have specified ground heat pumps.

For those of you that don’t know Q=v X A, where Q is the volumetric flow rate, v is the average velocity of the fluid and A is the cross sectional area of the pipe or hose. Then from there you can compute W = Q x rho, where w is the mass flow rate, Q is as above and rho is the greek letter symbolizing the fluid density.

BP – Should the oil industry be suing us now since we are underpaying? By your logic, we underpay a lot in the winter. You should offer to pay more to be fair.

john sherman says:

June 23rd, 2007 at 4:27 pm

Except gas is measured at a standard 60 degrees; I believe in Canada where the self-interest of the oil companies requires correcting for cold weather, the pumps in fact do.

On Dick Cheney, if his real job is legislative, i.e., presiding over the Senate, can we get a record of how often he’s showed up for work. I’d be willing to bet sight unseen that he hasn’t taken the chair more than ten times in the last year. Can we fire him for poor attendance?

D.J. Tice says:

June 23rd, 2007 at 5:08 pm

Interesting comments. For what it’s worth, here is a discussion of this matter from the Kucinich committee: http://www.consumerwatchdog.org/resources/DPReportHotFuelUSAJune07.pdf

It claims that its calculation of the “hot fuel premium” is based on “a
temperature survey of actual gasoline temperatures taken in underground gasoline storage tanks.”

There is no discussion I see of the point CNC raises — what we might call the “cold fuel discount” drivers would, under this theory, enjoy in the winter. My own suspicion is that market forces would also mostly eliminate that, but either temperature effects operate in both directions or in neither.

One other interesting detail is that Minnesota was not included in these calculations, apparently because our state does not allow temperature adjustments at either the wholesale or retail levels.

Thanks, readers, for the stimulating exchange.

Bill Prendergast says:

June 23rd, 2007 at 6:53 pm

Well, I sure ain’t no engineer, but after reading comments by John I, Cash, John S, and Mr. Tice– I still think there may be a “there” there for a suit against the oil companies, assuming you’ve got state governments that are hungry for compensation/funds without raising voter taxes. If you guys are aware of the issues involved, you can bet that the energy companies have done papers on those issues–and that’s evidence. It’s probably worth the trouble for the AG to investigate the situation in MN. (That tobacco lawsuit money MN got came in handy when they were using it to fudge the budget and hold down the tax burden. Wouldn’t that be great if the oil companies ended up paying for a new state infrastructure?)

Anyway–I dropped already dropped a line to Swanson and Ciresi. I’ll tell you if they answer their email. John I, thank you for the info on why you shouldn’t top off the tank, and your take on the gas station owners’ predicament.

Cash–my wife came up with the same argument you did (that we may be underpaying the oil companies for gas in the winter time.)But no, I don’t think the oil companies should be suing us; don’t run for office on that platform.

Bill Prendergast says:

June 23rd, 2007 at 7:06 pm

Hijacking for a war story:

Big battle coming up right now in Iraq–

“Thousands of Troops Close In On Militants
Battle Is One of the Fiercest Fights in Operation Phantom Thunder

http://tinyurl.com/2nq8rk

By JOHN HENDREN
BAGHDAD, June 23, 2007

Ten thousand American troops closed in on hundreds of suspected al Qaeda militants in western Baqouba, in Diyala province, the fiercest battleground in Operation Phantom Thunder, in a multi-pronged attack that is the largest single military campaign of the Iraq war…”

God bless our boys and girls–victory and safe home, please.

Michael Blaine says:

June 24th, 2007 at 4:30 pm

Check out my constructive bashing of Barack Obama at “Rudely Stamped.”

Michael Blaine
http://www.rudelystamped.blogspot.com

Cash N. Carey says:

June 24th, 2007 at 9:34 pm

BP and I agree on something. I think heck is freezing over.

As far as the link that DJ gave out: I couldn’t find the table. So I did a search on my own and found this: http://www.energyquest.ca.gov/story/chapter11.html

It states: “Almost everywhere across the entire planet, the upper 10 feet below ground level stays the same temperature, between 50 and 60 degrees Fahrenheit(10 and 16 degrees C). If you’ve ever been in a basement of a building or in a cavern below ground, the temperature of the area is almost always cool.”

I believe in market forces. I travel less than 8000 miles/year in my vehicle (a car). If it offends folks on how much money big oil makes, use less.

God bless our troops.

Bill Prendergast says:

June 24th, 2007 at 9:47 pm

It was bound to happen once out of every 100,000 times, Cash. It’s sheer statistics catching up with us.

parthian says:

June 25th, 2007 at 8:14 am

Big oil is not a competitive market—it used to be Americans understood that monopolists and oligopolists were screwing them and needed to be dealt with through regulation. Now we’re told by our fabulous Right that “the market” response is to buy less from those with enormous market power.

Common sense Americans a hundred years ago would’ve laughed in Cash’s face.

This is the height of conservative “wisdom”, folks. It’s all they have to offer. It’s all you’ll ever get from them. Unaccountable corporate power dressed up as a great virtue, because YOU’RE really in charge!

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