Bryan Caplan  

Gasoline Delivery: Inside the Black Box

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Yesterday I had two lucky breaks at the gas station.  First, they cut the price while I pulling up to the pump.  Second, a delivery man was refilling the station's tanks, which gave me a chance to ask him some long-standing questions.

Q: Do you fill up the whole station using that one hose?

A: Actually, there are two hoses.  One puts the gas in.  The other sucks air out.

Q: How many stations can you fill up with one tanker car?

A: Just one.

Q: How many stations do you fill up every day?

A: Five or six.

Q: Where do you get the gas?

A: There's a depot in Fairfax. [Who woulda' thunk it?]
I wished I'd asked the deliveryman and the gas station employee (who looked like he might be the owner) if anyone expressed anger at them when the price of gas spiked.  But I wasn't even sure how to ask the question without sounding like I was angry.  My best guess: "I teach economics, so I know you're not to blame for higher gas prices.  But did anyone else get mad at you when gas jumped up to $4/gallon?"

Suggestions?


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COMMENTS (18 to date)
Mike Hammock writes:

There have been a series of bizarre gas shortages in the Southeast. I'm not sure of the cause of this (possibly price gouging laws, but the geographic pattern of shortages is hard to explain this way). By shortages I mean honest-to-goodness lines of people waiting at pumps, and gas stations selling out of gasoline.

I've been trying to figure out why this happened, and to do so I've been asking gas station attendants how their pricing works. You're right, it's very hard to ask questions without coming off as someone who is full of righteous indignation. The woman at the Exxon station down the street was visibly uncomfortable when I asked her questions about how they choose their prices and how often they're updated.

jay writes:

I used to work at a union 76 and people would ask me all the time about how the owner does the pricing. I asked my boss one day about it and he said that he had very little control over the pricing. the company gave him a very small range of prices to choose from, usually only a few pennies. So i guess it might bother the gas station owners when customers ask them about the pricing because they really have little say in what the price is.

jb writes:

There were shortages in the Atlanta area (which then spread further out into rural Georgia) for about five weeks, from the first week in September until the first week in October.

My understanding is that it was caused by a significant reduction in Texas oil production (thanks to the hurricanes), which is where Atlanta gets all of its oil.

Actually, no, that's not the reason. That was the input. The actual _reason_ there was a shortage is because our super-intelligent governor said that he would shut down any gas station that 'gouged' anyone by charging more than they "should" based on their wholesale gas prices.

So rather than risk bankruptcy, jail, etc, the gas station owners let their stations run out of gas instead.

Because if the prices rose, it would inconvenience the poor more than the rich. If there's no gas to be had, it incoveniences both the poor and the rich equally.

Social Justice!

bt writes:

Hello,

I worked at a gas station during my undergraduate years. Please be careful when filling up your car while the delivery truck is filling up the underground tanks. There is always some sludge (mixture of water, varnish and dirt) at the bottom of the underground tank. When the underground tank is filled up, the sludge gets agitates and takes about half an hour to settle down again. It's not the stuff you want in your car's tank as it can plug up the fuel injectors.


BT,

jeff writes:

I wouldn't ask a man in charge of filling up the big tanks about prices... He's controlling the supply and I wouldn't want to piss him off.
As for oil prices, I think people are bailing now and will continue to bail and I wouldn't be surprised to see oil trade at production economics and may even over correct.
I read a piece by a exec at a big energy company that argues that we will have oil between $50-60 by the end of the year.
Not a bad turn around from the near $200/barrel earlier this year, but not without pain either.
http://www.greenfaucet.com/blogs/hanlons-pub
I suspect OPEC is working on cutting production though.

Dan Weber writes:

I was in the Charlotte area and we ran out of gas many times, which sometimes made for 30 minute lines.

One of our candidates for governor (who is an economics professor!) said in the debate last night that the shortages were caused by the price-gouging laws. It's reasonable, but he didn't give any proof, and the eastern part of the state didn't have the same shortages.

RL writes:

The question I have always wanted to ask gas station owners is why they don't retool the gas pumps so the numbers look like what we're used to in restaurants: Pre-tax price + total tax = price paid.

Sure, there's small numbers indicating tax/gallon, but we live in an innumerate society. I think people would be a lot more upset with govt and less upset with oil companies if instead of seeing Total: $76, they saw: Gas: $64, Tax: $12, Total: $76

[That calculation was based on gas at $3.30/gal and a 54ยข/gal tax, which Googling tells me occurs]

"Do you get a lot of idiots complaining when the prices go up?"

By calling them "idiots", you're simultaneously excluding yourself (nobody calls himself an idiot) and excusing present company for thinking they're idiots, which they undoubtedly do - because there's nothing they can do about the prices.

Following that branch of the conversation, I'd probably go on to ask "Does anyone ever thank you for lowering the price when it goes down?"... the answer will almost certainly be "No", and then you can close the conversation by saying "Well, thanks" and leave everyone feeling good about the whole thing.

libfree writes:

The reduction in supply in the southeast were caused by the inability to refine gas in the gulf coast area following the hurricane. Shortages were caused by people refilling almost full cars, gas cans and cars they don't even drive. I witnessed this on numerous occasions. Prices did not rise to discourage that but we do have price gouging laws.

Dave writes:

Bryan, try this book. The first half is a pretty interesting expansion on your conversation with the tanker guy:

http://www.amazon.com/Oil-Brain-Petroleums-Long-Strange/dp/0767916972/ref=sr_1_47?ie=UTF8&s=books&qid=1224183506&sr=8-47

the second half is a generally forgettable analysis of the geopolitics of oil.

enjoy,
Dave

Josh writes:

I was going to say Bryan had two lucky breaks and one unlucky break, but BT beat me to the punch. Filling up your car while gas is being deposited at the station can be harmful to your fuel injectors.

Adam Ruth writes:

"Because if the prices rose, it would inconvenience the poor more than the rich. If there's no gas to be had, it incoveniences both the poor and the rich equally.

Social Justice!"

Sadly, this is actually the true thinking of many socialists. I've been told that since "property is theft" it does make more sense for everyone to be worse off as long as we're all worse off equally, than for everyone to be better off but for some to be better off than others. I guess they think the "justice" comes from rolling back the evil violence that is property ownership.

Vincent Clement writes:

BT and Josh: Hogwash. Almost every vehicle has a fuel filter in the fuel line.

Besides, wouldn't the pipes that feed the pumps be located at or near the bottom of the fuel tanks - where all the sludge is?

macquechoux writes:

I use to own a small jobber/wholesale fuel & lube business. It was my tankwagon or big rig you saw filling up local stations. I was in business during the Arab oil embargo. So, what do you want to know?

BT writes:

Hi Vincent,

The pipes that feed the pump are not located at the bottom of the tank for precisely this reason. Fuel filters do serve to reduce contaminants from damaging the car, but replacing them is quite expensive as well (the filter is cheap the labor is outrageous). The sludge can also clog up fuel lines which is another expensive headache. Best to avoid the hassle if at all possible.

BT,

Kevin H writes:

In addition to te contaminants at the bottom of the tank being agitated during filling, you also have quite a bit of air mixed in with the gas as well as a higher temperature product (which means volume increases - but usable energy stays the same). So if you fill up while the delivery agent is dropping product into the tank (it is normally a gravity drop - not a pump) you are getting less energy for the same dollar you would pay for filling up at 6AM with product that had been in the ground for a couple of days.

On the Atlanta shortages, there was an actual supply disruption for 3-4 days followed by decreased supply through the pipeline from TX/LA. People were filling up an average of 6 gallons at our stores - compared to an average of 11 during normal operations (which indicated top-off behavior). This led to an actual increase of gas inventory in the Atlanta area for the last 2-3 weeks of the shortages - only theinventory was in peoples cars and lawnmowers instead of the terminals and gas stations. The gauging laws also prevented market rationing.

The east side of North Carolina is supplyied by a different method than Western/Central NC. Alot of product comes in by barge from Chesapeake refineries instead of through the Colonial/Plantation pipelines. My mother lives in Southeast VA and never saw a disruption.

If you are a branded gas station for one of the majors, Shell, Chevron, Exxon, they have alot to say about your price. In addition, the micro-markets of major intersections drive price alot. As profit-maximizing businesses, prices are kept as high as possible without leading to a decrease in volume. The store across the street goes down a nickel and so will this one - normally.

The interesting thing to me is how long it is taking prices to come down with the major spot gas market decreases. We are at 2.97 in Birmingham Alabama and laid in costs at stations are running about 2.50. This market normally only bears a 15-25 cent markup over cost. Everyone is holding onto the margin as long as they can. Prices have dropped 40 cents in two weeks though.

Sorry for the llong post. It is rare that I have any knoweledge that may be noteworthy to comment on a blog. Working at a large oil distributor/jobber gives me some insight. Running my companies IT department and Business Intelligence unit gives me additional insight into market behavior related to goas stations.

K.A.H. writes:

So anti-gouging laws did cause the case where eastern NC had gas and western NC didn't even though the stations were in the same state. If the gas stations in western NC paid depots in eastern NC to fill their tanks the price of gas would be higher because of higher transportation costs and market competition.

If you offered me $1000 for a gallon of gas I would fill up one of those red containers and drive from NJ to NC tonight.

Jaap Weel writes:

You can see the tanks of a biggish gasoline depot behind Fair City Mall on Pickett & Main. I imagine that's the one he's talking about.

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