It was the first of July 2021, and while trying to close the company books, I received three separate calls from local media regarding gasoline taxes (I've attached the interview with Fox 26 in Fresno). This was odd because California's gas tax was only going up from 50.5 cents/gal to 51.1 cents per/gallon. The first caller asked if I could comment regarding gas taxes going up 6 cents per/gal -- I politely explained that it was only 6 tenths of a cent/gal! However, never one to miss an opportunity, I told the reporter that the real story was not gas taxes rising by 6 tenths of a cent, but that the total amount of taxes and fees on gasoline in California were around $1/gal. Of course no one believed me, so herein lies the benefit of being an economist and fuel distributor:
Federal Excise Tax: 18.4 cents/gal
State Excise Tax: 51.1 cents/gal
Low Carbon Fuel Standard Fee (LCFS): 20 cents/gal (approximately)
State Sales tax: 12 cents/gal (approximately)
Total: 101.5 cents/gal = $1/gal (give or take)
Only a fuel distributor would know that the LCFS fee is buried in the price of gasoline, and not considered a tax. It looks like a tax, smells like a tax, but guess what -- It's not a tax. Go figure. It's a nice way to fund the "bullet train to nowhere" without having to account for it, as you would with a tax!
In addition to talking about gas taxes, one of the reporters asked a great question: "I hear there is a shortage of gas tanker drivers. How is that impacting you?" I recently was texted a screenshot of a competitor's flyer looking for drivers. They were offering $120K to drive in the San Joaquin Valley, and $135K to drive in the Bay Area! After you pick yourself up off the floor, you read me right. Six figures to haul gasoline! What's the deal, you might ask? Why can't you attract drivers at that rate? While I can only speculate at this point, but I believe it centers around the same issues facing the restaurant industry. At the peak of Covid, retail gasoline outlets saw their sales fall by about 30%. I'm sure some drivers were either furloughed or laid off. Enticing them to return, while receiving extended benefits to stay home is having an impact. It's funny that restaurants stand accused of not paying their labor enough in the first place, but here's an example where employees were clearly adequately compensated, yet now choose to stay at home. So much for that argument! I don't have time, nor the inclination, to dive into the data to support my conclusions, I'll leave this to anecdotal evidence.
Another great question was also posited. "Who bears the cost of these additional taxes and transportation expenses?" In this case (gasoline demand), the consumer bears the cost. However, the answer depends upon the "elasticity of demand" for the market the taxes apply to. Before I was in the petroleum industry, I would ask my students why was it that oil companies tend to profit from rising prices, and hence are routinely chastised by the media; however, Walmart has made a living off of lower prices? While both industries are profitable, one is lauded and the other despised -- all because of the price elasticity of demand. First, let's consider gasoline.
The demand for gasoline is similar to the Inelastic demand curve illustrated below:
The Law of Demand tells us that all demand curves slope downward; however, it says nothing about the steepness of the curve. Without getting overly complicated, this "steepness" represents the elasticity. Since gasoline has no close substitutes in the marketplace, as prices rise, the quantity demanded decreases, but not by much. Intuitively, this makes sense. You might forego a road trip if gas prices rise 40%, but you still have to drive to work. In the example illustrated above, a 40% increase in price only reduces the quantity demanded 10%. In this case, the suppliers are rewarded by higher prices, how? They sell 10% less, but get 40% more for what they end up selling. This price increase actually results in increased revenues! Unfortunately, with regard to elasticity, you really need to work the math. Consider the example illustrated above:
Total Revenue @ $10 = Price ($10) X Quantity (88)= $880
Total Revenue @ $14 = Price ($14) X Quantity (80) = $1120
Conclusion: when crude oil prices rise, gasoline prices rise. As gas prices rise, oil company's profits increase. This invariably results in government calls for testimony regarding price fixing, etc.; however, it's basic economics. I've actually tracked these calls for investigations into price fixing. When they announce the inquiry, it makes front page news. Inevitably, weeks/months later it is reported that there was no evidence of price fixing, and the story ends up on the back page.
Now, let's consider the Elastic demand curve for Walmart type goods. The following is a representation of demand for many Walmart goods. The graph itself illustrates why Walmart would never pursue a strategy to raise prices. Why?
Walmart sells items that are readily available elsewhere. If Walmart were to raise prices, consumers would simply get the items elsewhere. For the demand curve represented above, a 20% price increase results in a 50% decrease in quantity demanded! Wow! For a 20% increase in price you lose half your customers. Now do you understand why Walmart would never pursue a strategy of raising prices? Let's consider the reverse. Walmart decides to lower prices by 20%. The opposite occurs, and they experience a 50% increase in quantity demanded. What does this do for revenue? I'll let you do the math, but lowering prices on an elastic demand curve raises revenues.
Price elasticity of demand is one of the most important microeconomic concepts. I've literally used this concept to raise revenues hundreds of thousands of dollars. Products which I thought were elastic, were actually inelastic and vice versa. You may have to experiment with the price of a product to determine it's elasticity, but once determined, you can then make more informed pricing decisions.
Just a word about the point of this blog. If you made it this far, I congratulate you, as there's only a small number of followers anyway, and who knows how many actually read it to the end. I've decided to continue writing not for the number of followers, but to sharpen/keep my economic thoughts for prosperity. I find writing these posts cathartic, and try to limit their length to my own meager attention span. In the future, if some family member stumbles upon this and ends up with an interest in economics, all the better. Cheers!!
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