Sunday, July 28, 2013

Gasoline Prices

I thought I would provide some weekend entertainment here since there is little to write about in the markets.  I believe the stock market is fairly valued, however there are limited value opportunities out there but you must turn over enough rocks. 

Anyway... Every summer the price of gasoline rises and the complaints over gasoline prices begin to appear almost everywhere.  The victim mentality is common in our society.  Well, three years ago I read one such victim complaining in the editorial section of a local newspaper.   I instantly went to my computer and typed up my response.  This was my first letter to the editor.

I would note that this letter was very pointed to drive home the point.  For many people this message will not sit well because it challenges a number of beliefs.  So next time you hear someone complaining about gasoline prices, here is some ammunition.  If this does not sit well with you I would like to know why and what you consider to be false. 

(Please note I removed the name and location to protect the individual I was responding to.)

Dear Mr. Rodger _________. 

If you would like to see the person responsible for setting the gas prices, please go look in the mirror. Nobody forces you or your neighbors to purchase gasoline at any price. Nobody forces you to drive a vehicle. In fact, if you feel that they are making obscene profits you have the economic liberty to open your own gas station and to drive down the prices.  

The simple truth is our free market system works quite well at setting prices. The company that best meets the needs of the customer gets the sale. We ourselves collectively vote on prices every day in what we choose to purchase. The companies that charge excessive prices for goods will lose business through competition until the market reaches a fair price.  

I find it utterly ridiculous when people blame “greedy” oil companies for high fuel prices. A few years ago the price of gasoline was much higher than it is now. I haven’t seen any letters to the editor thanking “generous” oil companies who have now dropped the price to the current level. Perhaps this will be the first.

Sincerely,

Kevin Graham



Have a great summer!

Kevin

3 comments:

  1. Great blog.

    On your comment regarding market's valuation, what would you say to those who think that the market is in fact extremely overpriced given that corporate profit margins are well above the historical mean and that there will be substantial margin reversion over time?

    By the way, you're spot-on about gas prices.

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  2. Thanks. There are always those who believe the markets are overvalued.

    To those who say that, I would refer them to what Warren Buffett has written about interest rates acting like gravity on asset prices. Are corporate profit margins well above normal? Yes they are. Do interest rates play a factor? Yes they do in a couple ways.

    Now here is another thought. If low interest rates are here to stay, then assets such as stock are undervalued.

    Another question would be, how long is the mean reversion going to take? It could happen overnight, or over ten years. I don't know what or when but yes corporate profit margins will come down over time. Perhaps they will come down when the economy is much stronger? I have some thoughts on this but I honestly they are only theories.

    Best, Kevin

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  3. Hi Kevin,

    Good article on gas prices. Common sense to people who think rationally, which is a small group of society.

    Another point on the market being over/under priced. A lot of people still haven't go back into the market yet. When I go to parties or functions, people don't talk stocks. I think this bull market still has a few more years in it until the "average joe" gets into the market.

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