Sometimes the Customer is Wrong

By DAVID MOON, Moon Capital Management
August 27, 2006

The boycott plan sort of sounds promising, about like those 'Whip Inflation Now' buttons from the 1970s. It goes about like this, in case you've missed the emails:

The solution to high oil prices is simple, if consumers will work together. Let's show the oil companies who has the power by boycotting the gas stations affiliated with a specific oil company each month. Preferably, let's pick one that gets most its oil from the Middle East. Why should we keep sending our money to a bunch of people who are trying to kill us? See what happens when these overpaid oil company executives realize that we don't have to stop at the most convenient convenient store and that we can demand that gasoline prices be lowered. We have the power. The customer is always right.

And there's an old obese guy in a red suit who manages to shove himself down, then back up, every chimney in the world on a single winter night each year.

When you buy gasoline from an unbranded convenience store (think Pilot), you have no idea what oil company provided the gas you buy that day. So if your goal is to boycott all Exxon gasoline for a month, you are going to fail, because you will almost certainly inadvertently buy Exxon's products.

Imagine for a moment that consumers could temporarily avoid all retailers selling Exxon gasoline. Exxon has about four percent of the world oil production market. The oil market is already threatened by underproduction. Refining capacity already struggles to meet retail demand. Removing four percent of the gasoline from the world market would swing the pendulum clearly to the side of demand. The result of this month-long boycott would be higher prices, not lower prices.

The law of unintended consequences strikes again.

Whoever conjured up the 'oil company of the month boycott plan' shouldn't be terribly embarrassed. Our elected officials have a track record of coming up with even dumber ideas.

In April a Republican plan in the U.S. Senate aimed to ease the burden of higher gas prices on American families. The bill would have provided a one-time $100 gas-rebate check for families earning up to $150,000 a year. Yep: one hundred big ones. Two or three more tanks of gas. Or two pairs of tennis shoes. Or one college textbook. Fortunately the plan died a quick and natural death.

Democrats aren't immune to faulty gaseous thinking, either. A Tennessee congressman running for the Senate, lamenting the effects of our country's dependence on fossil fuels, proposed a unique solution: institute a 30-day elimination of the federal gas tax. Consider additional gas tax holidays, based on the success of the initial trial.

Somebody missed the first day of econ class. If you want to lessen our dependence on something, you don't cut its price.

And if you want to address real ' not childishly theoretical ' issues, you need an adult understanding of supply and demand.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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