(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)
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 changing 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, an 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.”