Yes, I dislike the current gas prices as much as everyone else.

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But I also think that we, as consumers, are every bit as responsible for them as the “greedy” oil companies. And I don’t really think that legislating extra taxes for these companies is fair.

Let me explain…

Though this is common knowledge to those of us who have business degrees, we often fail to realize that most of the people in the country don’t have business degrees. And thank god for that!

Prices are determined by supply (the amount of something that is available) and demand (the amount of something that is needed). Companies will price their product to make the maximum amount possible.

So why don’t companies charge massive prices?

Because higher prices will decrease demand for many things.

Sure, you’ll pay $12 for meals for two adults and two small children to eat at McDonald’s. And you may eat there once every 6 weeks. But what if those same meals cost $50? Would you eat there as frequently? No!

McDonald’s knows how to price its products to make the most money.

Now, let’s take a look at gas prices.

A gallon of gas used to cost about $2.19. Let’s just say that at that price, an oil company sold (for the sake of simplicity) 1 million gallons of gas in a certain time increment. So they made $2.19 million in that increment.

Then gas prices crept to $2.49. Consumers bought the same volume of gas. The oil company made $2.49 million – a $300,000 increase.

Now gas prices are at $2.95 here in Pittsburgh. Consumers still haven’t curtailed their consumption. So the oil company made $2.95 million – even more!

So what is an oil company to do?

They have a primary responsibility to their shareholders, so they are going to adjust the price until they find the “sweet spot” – the point at which they maximize their revenue (actually their profits, but let’s keep it simple).

Sure, they hear complaining. But consumers’ votes with their dollars (by continuing to buy the same amount of gas) measurably indicates to the oil companies that it is OK to continue to raise prices.

So, if you want lower prices, you have to curtail your use of gasoline, plain and simple.

If the oil companies found that raising prices from $2.49 to $2.95 would reduce consumption from 1,000,000 gallons per time increment to 500,000 gallons, here’s what the difference would be…

$2.19 x 1,000,000 = $2,190,000

$2.49 x 500,000 = $1,245,000

The oil company would make more money by charging lower prices, so that’s what they would do.

Now, again, this is simplified because to do a true economic analysis you have to factor in costs, consider volatility in supply, and base the price point on profits not revenues, but the concept is the same:

If you want lower gas prices, you have to commit to using less when prices are higher.

If you keep paying high prices, there is no incentive for the oil companies to lower their prices. If you don’t want to change your habits, don’t complain!

OK, back to CORPORATE procurement

Respectfully,
Charles Dominick, SPSM
President
Next Level Purchasing, Inc.
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Charles Dominick, SPSM, SPSM2, SPSM3

Charles Dominick, SPSM, SPSM2, SPSM3 is an internationally-recognized business expert, legendary procurement thought leader, award-winning entrepreneur, and provocative blogger. Charles founded the Next Level Purchasing Association in 2000, oversaw its incredible growth, and successfully led the organization to its acquisition by the Certitrek Group in 2016. He continues to blog and provide advisory services for the NLPA on a part-time basis as he incubates his upcoming business innovations. Charles is also the co-author of the wildly popular, groundbreaking book, "The Procurement Game Plan: Winning Strategies & Techniques For Supply Management Professionals."

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