Oil Prices and Consumer Boycotts

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Why A Boycott of ExxonMobil Won't Work
Brian Gongol
You may have received an email forward that says we can fight rising oil prices by boycotting gas stations like Exxon and Mobil. Unfortunately, it isn't true. The good folks at Snopes do a good job of explaining why. Here's a shorter version:

Gas prices are dictated largely by crude oil prices, which are not set by the oil companies (like ExxonMobil), but by the production limits set by the OPEC countries. OPEC is an organization of most of the major oil-producing nations that sets limits on the amount of oil that the member countries will produce.

Crude oil prices are about half of the cost of gasoline. The oil companies only expect to make about 10% from the price of your gas, which is roughly the same as most businesses in any industry expect to make for a profit margin.

As the world population continues to grow, economies expand, and our use of energy increases, world energy demand increases. Between increasing world demand and OPEC production cuts, there's little that the oil companies can do to influence prices. OPEC is the real villain of oil prices.

The good part is, OPEC is just a couple of countries who promise each other that they'll cut production back in order to artificially raise oil prices. Of course, when those prices rise, the individual countries have an incentive to produce more in order to make more money. Usually, one of the countries breaks down sooner or later and cheats the cartel and the whole house of cards crumbles. Everyone goes back to producing more and prices go back to where they started.

There's no guarantee on just how long it will take, but it's almost inevitable that production cuts by the cartel will be short-lived. Think of it like this: If everyone in the entire country really did follow a boycott, Exxon really would have to cut prices just to get customers back. And if that happened, somebody would break down and go back to buying gas from the Exxon station. Thus, the boycott falls apart. If you think of OPEC production cuts like boycotts in reverse, you can see that they can't last forever.

The other part of the equation: OPEC's share of world oil production has fallen. In fact, they produce less than half of the world's oil today. Cartels are doomed to fail in the long run. We may not have to worry about them much longer, especially if a democratic Iraq can re-enter the world markets and stay out of OPEC.

Bottom line: Forget it. Don't waste your time on a "boycott" of any oil companies, because the system just doesn't work that way. And don't send the forward along, because it's just going to clog someone else's inbox.

Gongol.com posted 2.28.2004; updated 8.16.2004