Shakespeare and Julia Child on monopolies, competition and alternative fuels

You must remember the famous community activist who once asked, “To be, or not to be, that is the policy and behavior question; whether ‘tis nobler in the mind to suffer the slings and arrows of outrageously high, constantly shifting gasoline prices or to take arms against a sea of troubles generated by monopolistic fuel markets and open them up and end them.” I’m paraphrasing, of course.

Unfortunately, Shakespeare, now that we need him, is no longer available. But his question, articulated by his political friend Hamlet, still needs to be answered. I suggest we respond to his query in the context of another question: Is competition in the market for vehicular fuel a public good and in the public interest? Ah ha, you ask, why must we ask this question? Don’t we live in a capitalist or quasi-capitalist nation? Gosh, ever since we all were kids, were we not brought up on the wisdom of free markets and their ostensible link to freedom and democracy, a trifecta holy grail?

Sure we were! But the presented wisdom apparently didn’t mean all markets, and most important for this article, the market where most of us purchase fuel. By and large, the market for fuel is limited to a single, generally similar, primary product — gasoline. Competition, when it exists, generates from relatively small price differences, more often than not. Overblown value propositions in advertising concerning engine performance benefits from brand X or Y notwithstanding.

Consumers who, many times, assiduously read the papers or go online to find out where different brands of tires are cheapest or travel miles to visit dealers to get a perceived “good deal” on a car are frequently constrained to their neighborhood gas stations or the stations located near the nearest shopping center or big box store. While price may be a key factor in driving their decision as to which station will fill up their tank, absence of diverse fuel alternatives results in a relatively narrow band of prices per gallon and a competitive floor on consumer savings and costs.

Opening up gas markets will be tough. The oil industry controls or strongly influences over 40 percent of the stations and holds a big, profitable stick concerning what can be sold and how it can be sold at its franchised facilities. Prices are set low enough to scare independents into selecting less-than-favorable locations, or pricey enough to give them some room to keep their own costs relatively high.

To date, state pilot or demonstration programs concerning alternative fuels like ethanol and methanol have had mixed results. Why? Their costs of production and their environmental/GHG costs are lower than gasoline. Are we Americans just dumb? No. Initiatives to date have had to surmount problems including: consumer access to fuel stations with flex-fuel pumps (their costs range from $50,000 to over $100,000); a growing but still relatively small percentage of flex fuel autos compared to the total number of vehicles; the lack of consumer information concerning their own flex-fuel vehicle’s ability to use ethanol; the fear generated by some interest groups often related to the oil industry about the impact of alternative fuels on engines; the seeming ability of the oil industry to manage local prices; and the decisions by supply chain participants, particularly retailers to raise alternative fuel prices to capture immediate profits (reducing their intermediate and long-term ability — as the new kid on the block — to compete with gasoline.)

Evidence from Brazil suggests that demand emanating from an educated public, combined with a commitment to increase the pool of alternative-fuel vehicles and readily accessible fuel stations with ethanol pumps will cause a reduction in gasoline prices. Juliano J. Assunção, Joao Paulo Pessoa and Leonardo Rezende noted in a December 2013 London School of Economics publication, “Our estimates suggest that the model prediction is correct and that as the percentage of flex cars increase by 10%, ethanol and gasoline energy equivalent prices per liter fall by approximately 8 cents and 2 cents, respectively. Considering the volume of sales and size of the flex fuel fleet in 2007, a rough estimate suggests consumer savings to the order of 70 million Reais in the Rio de Janeiro state that year. Our estimates also show that the price gap as well as the price correlation between the two fuels has increased with the increased penetration of flex fuel cars.” Other studies have suggested similar positive impacts.

A U.S. recipe appears clear and consistent with America’s assumed belief in letting the market decide most resource allocation issues connected to the production of non-social welfare related goods and services. Ingredient one: Amend laws and regulations to encourage individual owners to convert older cars to flex-fuel automobiles; ingredient two: mix the resulting converted cars with newer flex-fuel vehicles to create a large flex-fuel pool; ingredient three: liberally sprinkle in enough information to inform consumers and potential-ethanol-supply-chain participants, including potential blenders and retailers, of the potential demand for ethanol as a fuel; ingredient four: add real, solid seasoning to the mix by fostering development, distribution and the sale of natural-gas-based ethanol to achieve significant increased environmental and cost benefits. Julia Child couldn’t build a better dish for the nation as it simultaneously tries to expand the viability of renewable fuels, and Shakespeare’s friend, Hamlet, would not need antidepressants.

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