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The Cargo Cult of Business » Something doesn’t add up…

Something doesn’t add up…

Published on 13 Oct 2005 at 8:53 pm | No Comments | Trackback
Filed under The Cargo Cults of Business, Business and Corporation Related, Economics and the Economy.

It always troubles me when part of my model of how the world works appears to be broken. I feel that I’m obligated to reconcile the workings of my mental model with my observations. I either need to show to my satisfaction that the things I’ve observed actually fit within the model even though at first appearance they don’t, or I have to modify the model to account for the observations.  

Part of my model of business, prices, and economics is that higher costs will be passed along the transaction chain.  ie. If a producer’s costs rise, the prices will rise at the retail level as well. That is a general rule, and the model allows for many exceptions in terms of propagation delay, competitive pressure, etc. but recently I made an observation which, by itself, seems to break the model.  

Gasoline appears to be cheaper in Oregon than in Washington. A quick and admittedly unscientific look at gas prices in Vancouver, Washington, and Portland, OR, just across the river, shows prices around $2.66 per gallon in Vancouver, and around $2.59 per gallon in Portland. Which represents a small difference in favor of Portland. Part of this can be explained by the difference in state tax rates. According to a number of different sites, (gasoline taxes) taxes are higher in Washington state by 4 cents per gallon. This leaves us with 3 cents per gallon to explain, a difference which I’m willing to write off to local effects, noise, or whatever.  

But…  in Oregon self-serve gas is illegal.  (several sources including)1

It seems inevitable for two reasons that this law should translate into higher gasoline prices in Oregon than in neighboring Washington.

First, there is the salary of the pumping attendant. I imagine that is a minimum wage job unless it requires safety certification etc. I would suppose this isn’t a major cost.  I was unable to find good numbers for the pumping speed of gas pumps, but based on experience, I’d say it takes about 3 minutes to pump 12 gallons. Call it 4 gallons per minute. An hour therefore gives the attendant the ability to pump 240 gallons. Maybe they can manage two pumps at once so perhaps 480 gallons.  Then of course unless the station is very busy they have a lot of down time, but let’s call it 500 gallons per attendant per hour.  It says here that the minimum wage in Oregon is $7.25/hr. So, that wage could, generously ignoring a lot of overhead and other factors, be under 2 cents a gallon.

Second, and more importantly, my understanding has always been that most gas stations sold gasoline more or less at cost, and made their profits from either convenience store sales or sales of motor oil etc. It seems to me that, if this is the case, full-serve, which keeps the customer in the car and out of the store, would have a devastating effect on sales.

So, clearly I’ve missed something. Are there significant liability insurance savings? Are there state subsidies?  Are some of my assumptions above way off the mark? How does this work? Furthermore, if there really is not a net cost, then why don’t we see full service in other states without state intervention? Wouldn’t customers demand the higher level of service? I have been told that the reason for full service becoming scarce in the midwest was the cost combined with the opportunity to get customers out of their cars and into the convenience store.

Something in the economics of gasoline prices in Oregon doesn’t add up. So, clearly I’ve missed something. Anyone care to tell me what?

 Update:

 Since I wrote this gas prices have been dropping all over the country.  In Portland they’re now around $2.21/gallon and in Vancouver they’re at about $2.27.  I won’t keep updating these numbers, they’re readily available, at these links for example: Portland   Vancouver   But, I wanted to make sure what I had noticed wasn’t a very short term thing.

 

 1 As an aside, I take some small issue with Mr. Virgin’s final paragraph:

In those two, and the other 48, the market has spoken as to what the bulk of consumers want. The market, it should be remembered, does not always speak with one voice, or say the same thing in every locale.

 While I agree that the market doesn’t always speak with one voice, and certainly doesn’t say the same thing in every locale, indeed, that is a great part of its strength in my opinion, I can’t agree that the market has spoken in New Jersey and Oregon.  Clearly in those two places it is the legislature which has spoken, not the market.

-- John
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