What is it, if not price fixing?

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klepssydra's picture

"Price fixing is a conspiracy between business competitors to set their prices to buy or sell goods or services at a certain price point."  From businesslaw-freeadvice.

I've heard over and over about the historically gigantic record profits being realized by the oil giants, and it makes one wonder why one of them, let's say Royal Dutch Shell, for example, doesn't cut their per-gallon gas prices by, let's say, 50 cents a gallon.  If gas is currently around 4 bucks a gallon, even at $3.50 Royal Dutch would still make a huge profit on gas sales, even moreso because EVERYONE in town would flock to the Shell station and buy their gas there.  Undercutting the competition's price to gain more business and drive the competitors out of business is what Wal-Mart is all about, and it's undeniably effective.  In the god-eat-god world of corporate profit lust, it's a proven strategy.  Yet EVERY gas station in EVERY town sells their gas at the same price, or within a few cents at most.  Even Valero, having made huge expenditures to allow them to refine cheaper, heavy sour crude, stays at the same price point.

Yet, when was the last time you heard any politician even claim that they were going to launch a serious investigation into this most blantantly obvious example of price fixing...or, in this case, should I type, price-fisting?


smilingcat's picture
There are other explanation

There are other explanation why this is so, that is why you do not see the price coming down and why the price do not reflect the cost of the crude.

Many have heard of Laffer curve. It's actually an oversimplified view of maximizing revenue (tax). but the big picture of laffer curve can also be applied to gross and net profit. Multi-variable economic models are developed using thing called econometrics (mostly multi-variable statistics and multi variable regression, linear algebra). These models can be developed with reasonable accuracy because the companies have an incredible power to data mine you, me, and everyone else's buying behavior and buying pattern. They have a very good model of kind of car you drive, miles driven per day, and even your driving habit by noting how often you refil. They just can't pin point who you are. They have massive amount of data in form of statistics. And from this they can predict how much you are willing to pay, how the cost of the gas is going to affect your driving habit and so forth. And they use a mathmatical method called gradient to find a maximum point of their profit.

Simply they are gaming you and you at a disadvantage because you use a debit card, credit card, gas card, bank card. using of cards allow them to data mine you every time you use your card.

And because they are gaming you with a very sophisticated modeling (you can get a Phd in it) and models being generated by each company are going to give them result that is within tight spread of one another. Kind of computer they use are supercomputers. look up uses of HPC (high performance computers) and you will see that one use is for financial modelling use.

Wally world does this too.

Goldman-Saching and other banks use econometrics to game on Wall-Street. The guys who do this are referred as Quants. Many of them have Phd in mathmatics, computer science, physics degrees. You may want to google quants or even in Amazon. They will give you an idea of kind of people you are dealing.

douglaslee's picture
Some claim OPEC, however more

Some claim OPEC, however more is being produced and less being consumed. The US is actually a net exporter of oil. Take a look at unregulated commodities and exchange in oil futures. Manipulation is the new supply and demand. Why compete when you can cheat? American business is not product, it's fraud. The more you make through fraud, the more you have to buy more deregulation. 

Santorum is campaigning on freedom, Romney is trashing law, you can do business with laws hanging over your head. That's why Dodd-Frank, Sarbanes-Oxley, mark to market, no equity real  estate are all on the chopping block. Fraud is the key to economic recovery.

These TX surgeons performing 3,4,5 spinal fusions on the same patient [only 60% die] at the clinics they own, charged to medicare. That's no problem, Paul Ryan will end medicare. Problem Solved

klepssydra's picture
I'm not talking about why the

I'm not talking about why the price of gas is so high, and I'm not talking about why the price of gas may or may not come down.  I'm talking specifically about the fact that gas prices are fixed at a certain point when the people fixing them do not have to do so.  There is nothing at all that is forcing the oil giants to sell their gas at any particular price, beyond the need to make an obviously huge profit, and pure old fashioned greed.  I'm focusing on why that price is so, so uniform, when in fact, any of them could simply lower their prices somewhat, grab a huge additional market share, and ultimately screw their competitors.  The only answer to this particular situation is price fixing.

smilingcat's picture
Maybe I wasn't clear enough.

Maybe I wasn't clear enough. they are maximizing their profit. And why shouldn't they?

They are maximizing their profit through understanding the market place better than you or me. They know how much you can afford, anything more and you start reducing your consumption so much so that they make less from you and the aggregate of consumers. And conversely, they are not going to reduce the cost because you will not be increasing your gas consumption.

The price seems so uniform is because they all use same kind of mathmatics called econometrics. Models from each company will differ but the results they get will be pretty much the same.  It's not about bunch of guys sitting together to figure out the cost. This would be in direct violation of Sherman anti-trust laws in US. In fact three companies in Ontario Canada was just found guilty of price fixing from May to November of 2007 under Canadian law.

And for your information, gas price in US is relatively cheap. Petrol cost in England and rest of Europe is more than twice that of US. Want to pay $8.00 or more per gallon of gas? Oh in England, and Europe, gas is dispensed in litre not in gallons, not in imperial gallon. (Imperial gallon is around 1.2 gallons in US).

If you this isn't satisfactory, tell me what you want me to explain and I will try again.


DRC's picture
I will grant that if you

I will grant that if you believe in "fiduciary responsibility" and the ultimate morality of the market to judge humanity, there is no reason these sharks--oops, an insult to dignified ocean creatures--these vultures--darn that insults carrion eaters--these vampires--oh damn, even the undead deserve better than this--how about these pieces of oozing toxic nuclear waste, have every "right" to do what they do.

The specific legal crime is commodity speculation by people who will not possess nor use the commodity.  This should be stopped.  But, as you describe the entire gaming of the market, what you have is a criminal distortion of what is still a pipe dream or even fraud.  Let's just say that fixing the games at Vegas would be called criminal even if one accepted gambling as the moral model for economic life. 

What is wrong with this picture cannot be answered in one sentence.  You can explain the pathology all you want, but what we need is the cure for the disease, not just how to understand it.

If we had European rails and social policies, the price of gas would be a lot less of a hit on workers and the Middle Class.  We pay the subsidizies for this "cheap gas" as well.  Just not at the pump.

smilingcat's picture
I'm not advocating for

I'm not advocating for allowing commodity speculation. Far from it, What I'm pointing out is how some industries price their goods.

Commodity speculation should be banned! It's more than just gambling. commodity future market's original reason for being was to help with stabilizing the commodity price for both the producers (farmers) and their customer be it Con Agra, ADM, General Mills etc. Farmers sold futures to guarantee a price and buyers wanted to lock in the price for the future. This avoided some of the vagaries of the spot market price.

What Quants in Wall Street is doing, is by using the same mathmatical tool, econometrics, they can guess or predict fairly accurately on how much they can make by injecting themselves between the producers and consumers. Be it farmers and grain mill, Con Agra, General Mills or oil producers and refiners.

This would lead to a next philosphical question. But I will refrain. Lets just look at one thing at a time.

DRC's picture
As Lucy the Psychiatrist is

As Lucy the Psychiatrist is In says, Charlie Brown, I just point out the problems, I don't try to solve them.  I will agree that knowing how the crimes are being committed helps, but only if you do take that next step and do something about them.  We tend to excuse "business as usual" if that is all we hear of an issue.  Sure, everyone on Wall St. is using these techniques to screw us.  Do you recommend better lubricants or the end of the rape?

smilingcat's picture
Boy, got a live tough

Boy, got a live tough customer here.

I was answering the question/curiosity posed in the first post. Not about how do we stop "gambling" on commodities future.

So DRC, we could start by rolling back Commodity Futures Modernization Act of 2002 or was it 2003. It was signed by ohh lets see. Pres. Clinton. Proof positive that Pres. Clinton was not a progressive. Bought and paid for by big business. This would be a start. By rolling back the act, banks would not be allowed to participate in derivitives on the futures market.

We need to bring back laws enacted back in the '30s. The laws which were overturned in '80s and onward.

We can't afford all this

We can't afford all this cheap gas!

DRC's picture
I agree with Robert Reich

I agree with Robert Reich about Dollar Bill wasting his presidency.  It is not enough to blame the impeachers or to recognize that he was the best Republican Emperor before Obama.  And, chilidog, the price at the pump is not what you and I are paying for this crap.  Our 'fuel' is the by-product of what petroleum really produces of value, so the fact that they can squeeze our wallets for this is just gravy for the petrosaurs.  Our taxes for the MIC and the subsidies are also part of the price, as is the lag in the development of eco-friendly energy.


Karolina's picture
smilingcat wrote: We need to

smilingcat wrote:
 We need to bring back laws enacted back in the '30s. The laws which were overturned in '80s and onward.

Reminder:  HR1489, The Return to Prudent Banking Act

It still has only 58 co-sponsers, because it is basically word-for-word Glass-Steagall and is not allowed to get through by Wall Street and their politicians. 

Dr. Econ
Dr. Econ's picture
smilingcat wrote: There are

smilingcat wrote:

There are other explanation why this is so, that is why you do not see the price coming down and why the price do not reflect the cost of the crude....Multi-variable economic models are developed using thing called econometrics ...

This doesn't really answer the question. The question is not 'what is the maximum price the company can charge' but the question is why the oil companies are so unconcerned with lowering the price to a decrease in costs. And the answer to that question is because they are an oligopoly. So there is something like price fixing going on. But it is not explicit, since that is against the law. Instead, there can be a 'leader-follower' routine. There, a firm tests a price increase, and if other's follow, then everyone makes a lot of profit.  If they don't respond, the person testing or leading the price rise might pull back.  What you need in this model are events or excuses in which to test price rises - now it is Iran elliminating long term futures contracts from several European countries. Or, when the other players start buying up oil futures. Or if Romney says we should invade Iran.