I’m no economist, I’ve never run a business, but I do have a certain amount of common sense (as long as it doesn’t affect me directly) and a damned good head for numbers. And that is why I could see this one coming a long time ago:
Here’s a scenario. You sell a certain item. You are contractually limited to sell it at a certain fixed markup from your supplier — a hard number. On the other hand, your credit-card processor charges a certain percentage of each and every credit card sale you make.
Now, the price of your product is skyrocketing. You are still charging that same amount of markup, so your profits don’t increase in the least. Indeed, they take a hit, as people are buying less of your product. At the same time, the credit card company’s fees go higher and higher, as your actual sales — in dollars — are going up.
At some point, you will reach the point where you are actually losing money on each sale. This despite the record high prices of your product.
Enough abstract stuff. Let’s plug some real numbers into the equation.
You sell gasoline, and gas prices are at record highs. But your supplier says you can’t mark up the gas more than eight cents a gallon. So every gallon you sell, you make exactly eight cents, no matter what you pay for it.
At the same time, your credit card company takes, say, two percent of every sale they process for you. If it’s a dollar, two cents. If it’s twenty dollars, forty cents.
When your supplier sells you gas for $3.92 a gallon, you have to turn around and sell it for $4.00 a gallon. That’s in your contract. You charge anything else, they can cut you off.
Now, at $4.00 a gallon, what’s the credit card company’s take? Why, eight cents. The eight cents that was your profit on the gas.
Congratulations. You’re not making a single fraction of a cent on that sale. You’re dead even.
Now, say your supplier raises his prices to $3.93 a gallon. You’re now selling gas for $4.01. And the credit card company is taking 8.02 cents out of your 8 cents profit. You are now paying people to buy your gas. And the higher the price goes, the more money you lose on every single gallon.
Sounds terrible, right? But that’s just fantasy, just an abstract exercise, right? A cautionary tale of what might happen?
There are several possible solutions here. They all boil down to changing one of the portions of the equation:
- The price of the gas the dealer buys.
- The allowable markup the dealer can charge.
- The percentage of the sale the credit card company takes.
In reverse order:
3) Ain’t likely to happen. The credit card processing companies have a workable, profitable, sustainable business model. In the big picture, the amount of their revenues that comes from gas purchases is negligible. And if they carve out an exception for them, then they can count on a lot of their bigger customers coming to them for the same kind of deal.
2) This one might happen. But it’s a case of “the cure being at least as bad as the disease,” or “the operation was a success, but the patient died.” Suppose the dealers get to renegotiate their deal with their vendors, and change it to a percentage. The end result will be higher gas prices for the customers.
So, how about #1?
If you listen to the Democrats, the solution is to tax the oil companies more. This is typical of them — they want to do what their emotions tell them to do, and since all feelings are valid, that’s OK. The oil companies are making lots of money while we’re paying more and more, so let’s soak them with a “windfall profits tax.”
Sounds good, unless you actually think. Then you remember that the last time we tried it, the main consequence was a gas shortage.
And if you want to really have some fun, ask one of those “screw the oil companies” folks how jacking up the taxes on them will lead to lower gas prices. They won’t answer, because they can’t — it’s not about finding a solution, it’s about petty revenge.
No, the problem with gas is one of the most fundamental principles of economics — one even I can understand. Supply and demand.
Right now, there is a steadily rising demand for oil in the world. That means, even if the supply stays steady, the price will increase. That is non-negotiable.
So to change the equation, there are two elements to play with: supply and demand.
We’re already doing a bit about the demand end. People are moving away from big, gas-guzzling vehicles and moving into more efficient vehicles. (And, amazingly enough, they are doing it a hell of a lot faster on their own, without the government and its stupid “CAFE” fuel mileage standards would make it happen. Will you look at that — it’s almost like the free market works, and works far more efficiently than government regulation!) They are also driving a lot less.
Another approach would be to cut the demand by using substitutes for oil. A lot of our oil goes into energy production. If we actually started working on alternate forms of energy, that would also help.
That’s where we run into the “no nukes” crowd, the “don’t put a windmill where it might clutter up my beachfront mansion view” crowd, the “don’t dam up the river because you might irritate this ugly fish” crowd, and so on. It’s long past time to tell them to shut the hell up and get out of the way of civilization.
Of course, that’s only a tiny part of demand. The rest of the world wants more and more oil, too. India and China are both increasing their consumption, just to name two, and they are soaking up more and more of the world’s oil supply.
So, how about increasing the supply of oil?
We can’t do THAT!
Nah. Better to let other countries sell us the oil. Let THEM pollute their land and seas, let THEM gut their territory, and let THEM keep their noose around our necks.
We have tremendous oil reserves of our own, but we simply won’t let ourselves develop them. We’re told that it’s too risky to the environment, and it will take years and years to see any real benefit from them.
Well, the environment is going to get “endangered” anyway. The real question is, “do we want the Nigerians, for example, to utterly trash theirs, with their less advanced techniques and lack of environmental watchdogs, or would we rather have it done here in the US, under our scrutiny, using the latest and best technoloogy to keep it as clean as possible?”
Another real question: “Do we want to continue giving other nations this much power over not only our economy, but our whole way of life?”
And a third real question: “Yes, we won’t see any real benefits from this for five years, if you don’t count all the jobs created in the process of getting these new oil sources online. But guess what? Five years from now, we are almost guaranteed to be in just as rough shape as we are today, if not worse, so why not get started today on not letting that happen?”
I don’t know why I ask these questions; I already know the answer.
“But… but… Big Oil is making obscene profits! We need to punish them!”
I’m sure that, somehow, in some bizarro universe, screwing over Big Oil will make things better for all of us. But I just don’t see it.