rklindell, gas prices in Calais and other border communities are always higher than other regions of the state due to their proximity to Canada. Your assumption that if our prices were equal to Bangor pricing is wrong in that we do indeed have a great influx of Canadians purchasing our gas because even at our inflated prices we are still cheaper than a New Brunswick station. Somebody is making a buck on our backs in the border communities for this reason alone although it has never been proven according to the AG's office....hogwash.
I understand how you feel about this is an emotionally charged issue. If you ask 100 people in border towns about this you will find that 90 of them will blame oil companies for the fact that they pay more for gasoline than folks who live away from the border. However, if you understand the basics of microeconomics (Economics 101) you will find that it is the high gas tax in Canada that is to blame for high prices in Calais.
Here is how it works:
This chart shows supply and demand curves.
S is the supply curve. It shows how much gasoline producers will supply at given prices. The higher the price the more they will produce and bring to market.
D1 and D2 are demand curves. (will explain the difference between the two below). The lower prices are the more demand there is for the product. In the case of gasoline consumers buy more gas at $1 per gallon than they do at $5 per gallon and visa-versa.
D1 is the demand profile of a market like Bangor's It shows a normal level of demand and prices are in equilibrium with supplies at points P1 and Q1. This is the point of equilibrium where there is enough gasoline to go around at a price that consumers will buy all that is available - but no more. A lower price would result in shortages (remember the gas lines of the 70's?), and a higher price would result in surpluses of unsold gasoline.
D2 is what happens when demand goes up. Demand is higher in Calais and other border towns because gas is taxed at a much higher rate in Canada. That drives Canadians across the border to buy cheaper American gas (almost always from the same refineries in Canada).
The shift in the demand curve means that equilibrium occurs at P2 and Q2. This is the point at which there is more supply, but at ha higher price because of the greeter demand. This is an unpleasant reality for the folks in the border towns, and there is little you could do to solve the problem without causing even bigger problems.
Let's discuss some of the possible solutions:
1: A price cap:
If the government forced prices to be set at a point between P1 and P2 (imagine a dotted line drawn horizontally between P1 and P2) this would have no effect in Bangor. The equilibrium price in Bangor would remain at P1 because the price is below the government price cap. In Calais however the price cap would cause supply to shrink and demand to increase. The result would be gas stations running dry, gas lines and rationing.
2: A price floor:
Another (less popular) government action would be to mandate that gas stations in Bangor must charge the same price as gas stations in Calais. This would result in a surplus. Look at dotted line P2 and where it intersects supply curve S and Bangor demand curve D1. At that point supply would outstrip demand. Since selling the surplus gas at a lower price than P2 would be illegal, gas stations would be dumping gasoline (I don't know how they could dump gasoline - maybe they would have to rent a bunch of RV's and Hummers to make free pizza deliveries or something). We have seen milk and other agricultural surpluses occur as a result of price supports for farmers.
Authorities could prohibit the purchase of gasoline by Canadians unless they can prove that they burned the gas traveling on US roads. This would reduce demand sufficiently to bring border towns back to the D1 demand curve. It would require a very intrusive regulatory regime, and would reduce international traffic and commerce. I expect it would hurt the economy in Calais more than it helped.
A gas tariff on Canadians of P2-P1 would also shift the demand curve. It would be easier to administer than rationing, but equally unpopular and hurtful to the economy of the State. It would also require Federal approval and would probably violate international trade agreements.
If you understand the economics it doesn't change the reality but it at least allows you to know what is really going on. It is not a conspiracy by greedy capitalists. It is simply the market adjusting to compensate for the actions of a foreign government that affects local business.
My advice to folks in Calais is to stop complaining about something that you cannot control and try to make as much money off the Canadians coming to buy gas as you can. Maybe a casino would be a good idea?
Thanks for taking the time to make that excellent demonstration.
Another way to work out the gas price difference between Calais and Bangor is this:
Imagine that you're an accountant for several gas stations located somewhere in Maine, but you don't know where or for which oil companies. Your goal is to maximize profit at each one by adjusting the unit price at different ranges of units sold. You will inevitably find yourself charging higher prices at certain stations because you will notice that at those locations consumers don't seem to be as sensitive to higher prices.
In town A, for example, consumers purchase less volume when prices rise, so your profit falls off quickly. In town B, however, consumers don't reduce the volume they purchase as much as they do in town A when prices rise, so you keep the price up. You can charge a higher price and still make a profit in town B, but not town A. Town B is a border town. As an accountant you don't know that, of course, and you're completely innocent of price-gouging or collusion.
Sounds to me like a great chance for someone to open a "gas club" that would sell gas at a discount to locals. That too is part of economics. Someone seeing an opportunity to provide a good or service to a willing customer.
Good idea angler!
Given that the reports are now stating that gas is easily going to blow by $3 a gallon and may hit as high as $4, I'm willing to try anything!!!!!!! Even if it is a stupid idea!!!
What's the margin between the distributor and the retail pump? A gas club (in most places better known as a coop, and are you ready to become socialists?) is not going to significantly reduce your cost of gasoline - unless you use a lot. Gasoline may well hit $4 this summer. It could hit $5, depending on the weather - and geopolitcal events; like getting into it with Iran, Chavez getting crazier, or Nigerians in the delta demanding their due. Unless you get a bunch of folks together that use lots of gas, a "gas club" isn't going to make much difference in how much you save. Better to get an efficient vehicle and/or drive less.
Country - please read my discussion above. Price is not determined by input costs alone. Input costs have an effect on the supply curve. Price is determined by BOTH the supply curve AND the demand curve.
The effect of a "gas club" would be significant in an area like Calais because it could be a mechanism for adjusting the demand curve of the market that I described above. By limiting membership in the club to local residents you effectively ration gasoline and are able to bring down price by reducing demand.
It's coffee that's expensive....
Why are people who are willing to pay an average of $14.75 per gallon for Hazlenut Creme coffee bitching about $3 for refined fuel that must meet tons of federal regulations???
There's a Dunkin' Donuts on every corner now....let's put gas prices in perspective, please!!!!
Spinmaker makes a good point.
One of the problems with gas prices (and coffee prices) is that the demand curve is fairly steep. Economists call the steepness of the curve "Price Elasticity of Demand". A steep curve means that demand is "inelastic" a flat curve means the demand curve is "elastic". Very simply: greater demand elasticity means that demand rapidly decreases and prices increase. With the inelastic demand curve for gasoline, the opposite is true; prices have to go up a whole lot before people reduce their demand.
One way government can help is by encouraging conservation though public education campaigns in the hope that new behaviors by consumers will flatten the demand curve.
Milk is freakin' expensive as HECK!!!
Make your own, Catherine.
Milk is expensive because of a government imposed price floor. The policy is to benefit dairy farmers. The result is a surplus of milk that is routinely dumped. Then the government turns around and gives out food stamps to help low income people afford the price-supported milk.
Well, they can dump that extra milk my way. I like milk. My husband drinks sooooooo much of it, too.
[quote]Country - please read my discussion above. Price is not determined by input costs alone. Input costs have an effect on the supply curve. Price is determined by BOTH the supply curve AND the demand curve.[/quote]
That all sounds pretty fancy and nice. You must be taking lessons from Economike. :wink: But, I'll bet you dollars to donuts that a "gas club" in Calais won't bring down the price of gas enough to make it worthwhile.
[quote]That all sounds pretty fancy and nice. You must be taking lessons from Economike.[/quote]
I doubt there's anything I could teach rklindell that he doesn't already know.
[quote]But, I'll bet you dollars to donuts that a "gas club" in Calais won't bring down the price of gas enough to make it worthwhile.[/quote]
I'll take that bet, country. I fill up at a wholesale gas club where the price is always a few cents below prevailing retail, and this is in a locale where demand isn't pumped up :) by the presence of Canadian motorists. It's obvious to me that the gas club idea works. To paraphrase rklindell - By limiting membership in the club to motorists who are more sensitive high prices to you effectively ration gasoline and are able to bring down price by reducing demand.
I would expect the price advantage of the gas club in a border town to be even greater.
Send oil companies a message -- take a walk
Kennebec Journal & Morning Sentinel Friday, May 11, 2007
The other day I was approached by one of my neighbors while purchasing gasoline in town at the store. Apparently a gas boycott is scheduled to take place on May 15.
So ... do we buy gasoline on the 14th or 16th? What does that really accomplish? We still buy the same amount of gasoline for the week.
[quote] I fill up at a wholesale gas club where the price is always a few cents below prevailing retail...[/quote]
A few cents a gallon makes that much difference? You must do a lot of driving in a gas hungry vehicle.
As a responsible consumer I think that it is my duty to seek out the lowest cost gasoline possible. (Unless it is from a Citgo station 8) )
A responsible consumer, and a conservative one, will use the least gasoline. 8)
[quote]A few cents a gallon makes that much difference?[/quote]
[quote]A responsible consumer, and a conservative one, will use the least gasoline.[/quote]
So, country, should we conclude that a responsible consumer will use the least gasoline, but shouldn't care about getting a lower price unless it's a whole lot lower?
Seriously, my only point about my local gas club is that [b]gas clubs are effective in lowering prices[/b] not whether I should think the price difference is worthwhile. Obviously it is worthwhile to me.
[quote]So, country, should we conclude that a responsible consumer will use the least gasoline, but shouldn't care about getting a lower price unless it's a whole lot lower?[/quote]
That's a fair assumption.
but ...........................im game....no gas today ......................easy when you drive a small toyota :lol:
Gee wiz - No price declines today! Plenty of people were filling up when I went by the local Exxon station. I have a 3/4 full tank, so I'll wait until tomorrow to fill up.