Gasoline is a Fungible Commodity

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Gasoline is a Fungible Commodity

By: Pete Geddes
Posted on June 09, 2010 FREE Insights Topics:

As the spill in the Gulf of Mexico drags on I’ve received several emails asking me to punish BP by boycotting the purchase of its gasoline. The idea is that by reducing demand for BP’s gas, BP will see a drop in profits. I understand (and sympathize with) the angst driving this strategy, but it won’t work. Here’s why.

Suppose that BP has 25 percent of the domestic gasoline market. (I have no idea what the actual number is, but for this explanation it doesn’t matter.) Assume tomorrow every motorist stops buying BP gas. This effectively shifts (i.e., increases) the demand for gas to other producers, e.g., Conoco. What will happen? Conoco faced with a sudden increase in the demand for their gas will raise prices. This same phenomenon applies to all of BP’s other competitors.

Since most refineries run at 90-95 percent capacity, there is not much slack in the system. Hence it will be difficult for Conoco to fill the gap between supply and demand for gas via in-house production only. So how will Conoco meet this new demand? They will buy gas from BP, which because of the boycott has new found spare capacity. (Gas suppliers buy and sell gas from each other all the time.)

The result is that BP still sells gas, but now at a higher price. In the short-term the boycott raises gas prices and likely increases BP’s profits. In the long run, the net effect is a breakdown in the boycott.

Turns out that gas is fungible, i.e., gas is gas, whether it comes from Conoco or BP. There aren’t special BP or Conoco gas pipes. All imported and domestic oil that enters the U.S. market flows into and out of the same distribution network. The same pipes, storage tanks, and transport network handles it all.

Oil producers are paid for the oil they provide to the network. The same applies to a wind farm or nuclear reactor providing energy to the grid. Each producer gets paid only for the power they provide. Once it’s in the network, gas, oil, and electrons are mixed. It is impossible to trace the flows of a particular brand of energy whether wind, nuclear, or gasoline. Consumers can only force gas prices lower by buying less gas from all stations. And that means driving less.

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