Follow up on How to Stop Paying So Much for Gas

New information is being released by the IAEA that is confirming the logic presented below.  To see those reports, read on to the bottom of the article where the links are provided.  

A reader recently questioned on a Facebook link exactly how the logic works that by filling up with less gasoline, that prices might be affected.  I am following up with this article, which copies the response to the question that was posted on Facebook.  Click the link to see the previous article titled "How to Stop Paying So Much for Gas" if you haven't read it already.

       

The logic is explained a bit more in a previous article linked in this one. The idea is maybe better explained this way. Imagine that your family currently purchases seven 2 liter bottles every week, one for each day, and you purchase them all in one day. Then imagine that this is common practice among everyone to do this. Stores and suppliers then would expect to meet specific demand, meaning production, logistics, and inventory management need to be timed well to meet the demand. Also, because large quantities (7 per customer) are purchased in blocks, stores would know that they can charge a bit more if demand were to ever outpace their supply for a day or two.

Now imagine that instead of buying seven 2 Liters all at once, instead you buy a 3 day supply, and then imagine almost everyone changes to do this. This does a number of things to the distribution model. One, it means that there will be a sudden oversupply of soda bottles at the stores. Due to this, stores will either discount the items, because they know a truck with more bottles are coming, or they will find a place to store them, which decreases the margin the store gets for selling the product. Also, because there are now 2.333 more transactions occurring to sell the same amount of bottles as before, the store will either try to normalize by lowering price (buy 3 get 3 free!), or will tell the supplier not to ship as much product.

The supplier then has a few options. Store the excess supply they are receiving from production, at their expense, or lower costs to their downstream to move product, or tell the producers to slow production.

Now, most producers have specific mathematical models on how much product they must create in order to maintain profitability. If they lower production, they will almost assuredly run at an operating loss because though they might be able to furlough employees on the production line, the mothballed equipment on the accounting books will be depreciating on the books regardless. So, producers have that option (which shareholders will not like because it means a decrease in shareholder equity), or the factory can store the excess at their own expense, or they can lower price and *increase* production to maintain revenue levels and profitability. Doing so reduces price for everyone downstream.

In effect, this is what the OPEC nations did for decades that made oil prices per barrel get into the low teens. They produced lots and lots of oil to meet specific revenue numbers, knowing that if they didn't produce as much oil, even though they could fetch a higher price for what they did produce, their revenues would in fact be lower because they would allow more competitors into the market (such as US competitors), who would jump on the prospect of producing oil at 60 per barrel, but would never even think to produce it at 20. 

It is the same thing that is causing the glut in natural gas prices, but even at historic lows, producers are producing more than ever. 

Whether at the beginning of the supply chain model or at the end, disruptions of the model can and do have impact on the bottom line: price. The article is proposing that now that OPEC producers are no longer able to flood the world in oil (there is too much demand), that we as consumers disrupt their demand models. Futures traders would be spooked (I don't want to be holding a futures contract in gasoline if there ends up being too much supply on hand in July), meaning prices would go down, and mid stream producers (refineries) would lower prices as well to entice buyers. Refineries wouldn't be able to "stop" producing gasoline, because it is a bi-product of oil feed stock that produces many other chemical products. Slowing production at the refinery would reduce output for all products, some of which carry higher margins than gasoline. Refineries have been known to loss lead on gasoline for that reason.

Lastly (whew), human behavior is to binge on supply. Take the soda example. When you buy lots of soda in advance, most of the time you go through it faster than intended. The same goes for gasoline. And you'll be able to take advantage of price fluctuations since on that chance you come across a station with a really low price, you'll have at least a half a tank of empty space to stock up on it.

But don't take my word for it. It is open for debate and discussion. Let's find holes in the logic to improve it.

The interesting thing is that just today, the IAEA is confirming that the US is putting a lot of oil on the market.  This increase in supply, along with reported "demand destruction" are going to hold prices lower.  Let's keep up the pressure on prices from both the demand side and the supply side.

How to Stop Paying So Much for Gas

Previously, I wrote a few blog posts on how to "short" sell the oil companies as prices of gasoline increase. If you haven't read them, you can take a look at them here for some economics backrground of why this idea works.

I am reviving this discussion again because prices typically start to ramp up in the late spring for summer driving, and because I've been seeing Facebook posts telling everyone to fill their tanks full, among other things, to save money. You can view that article text here. There are a few reasons I don't agree with filling a tank full if you are driving only relatively short routes (around 50 miles per day or less). The biggest reason is explained in more detail in my previous articles, but briefly it has to do with "just in time" distribution. Energy distribution models today are highly efficient, and the distributors are counting on meeting certain demand numbers on average. Meaning they are expecting most people to fill their tanks full at each fill up, and will work to meet that demand. But, what if we change the demand from what they expect it to be? Remember supply and demand curves from your Econ class? There will be too much supply, and the price will go down until the curve reaches equilibrium again.

So, how can we do this? By not storing gasoline for the oil companies by filling your tank full and getting a 500 mile range of driving before having to fill up again. Instead, fill to half full or to a dollar amount that gets you somewhere near the half tank mark. There are plenty of gas stations around these days along most driving routes that making 2 or 3 stops per week will not make you lose much time. It might even save you from wasting time and gas idling at a red light if you stop at a station on a corner.

Another reason I don't see a need to fill to full unless driving a very long distance is that many tanks these days are 17 to 20 gallons. That's a lot of flammable fuel, first of all, and it isn't weightless either (meaning it does take energy to haul it around. Whether it is negligible or not is debatable). More importantly, cars that were much less fuel efficient in the 1950's and 60's had tank sizes around 16 gallons. If a tank that size was fine for a car that got 10 mpg fuel efficiency, why do I need to fill up with 20 gallons in a car that gets well over double the mpg's? If anything, 8 gallons should be fine. Something tells me they want us to buy more product for more revenue... kind of like how restaraunts have increased portion sizes so they can charge more, without you feeling completely ripped off. Fill to half full, and they'll think twice about their pricing models.

Yet another reason is that most cars these days have fuel pumps that won't be affected by low fuel levels, as long as you don't run out of gas. And they have built in screens to keep out any debris or settled material (which would end up at the bottom of the tank whether half full or not, which goes against the claims of the Facebook posts), and even then most tanks are built with very good materials these days that won't corrode easily.

Do you really need more reasons? Another reason is the widely used rule in investing of dollar cost averaging. Everyone knows you want to buy low, sell high. But how do you time it just right? Even highly trained professional traders get it wrong. Dollar cost averaging theorizes that if you just buy at smaller, more frequent, but evenly placed intervals, your cost basis will be better than if you try to time the market, or buy in lump sums (i.e., filling to full). Gasoline prices are volatile, and that is where dollar cost averaging by buying 2 or 3 times a week and filling only half full will help. This means that because you'll be filling at quite a few different gas stations along your many routes, you'll be averaging a better price than you would otherwise. And chances are you'll be able to take advantage of a "dip" in prices when you drive by that gas station with a ridiculously low price and you only have an 1/8 of a tank left, further averaging down your overall cost of gasoline.

Lastly, we all know it is human nature to conserve, or at least to remind ourselves to be more economical with, our goods when we see a limited supply. Hoarding, or in this case filling to a full tank, can lead to an increase in consumption just because of feeing comfortable in our bounty. Who knows, you may save two or three percent off of your weekly gas cost just due to the fact that you are more aware and keeping yourself from making unneeded extra trips because in the back of your mind, you don't want to have to stop at a gas station sooner than usual.

Google Doodle Celebrates Ella Fitzgerald: Hear Her Great Style in This Video

I'm a big fan of lots of music, but jazz is a mainstay for me.  When I visited New Orleans years ago to watch the Sugar Bowl in 2009, I made a point to go to as many jazz clubs as I could.  From the historic sounds of New Orleans Jazz, to the rich and deep sounds of Miles Davis (who's recently dropped vinyl re-release of "Round About Midnight" I picked up last weekend on Record Store Day), to Dave Brubeck's cool transcendent rhythms, to Ella Fitgerald's boisterous and energetic sound and fantastic singing range, there is just something magical about jazz.

As if the era of bustling downtowns and newly lighted streetscapes was meant to be accompanied by jazz's breadth of technicality, volume, swinging notes, and improvised soundscapes, we constantly see the two intertwined in film, story, and culture.

Ella Fitgerald had a major role in that, by recording over 200 albums and selling over 40 million recorded works, she was a centerpiece of jazz music with a career that spanned many decades.

Her unique style, energy, and passion continue to be praised and emulated today in many genres beyond jazz.  Here is a great performance recording of Ella singing one of my favorite classic jazz tunes, "Mack the Knife".  Watch it and ask yourself "is there any wonder why she has been named The First Lady of Song"?

What not to do With Facebook Profiles When You Get Married

It seems like a trend among many of the people I know that once they get married, they "merge" their Facebook or other social networking profiles together, and use a name that combines both of theirs.  For example, something like "John Jane Doe", or something like that.

I dislike this trend (if only there was such a thing as dislike on Facebook, but that's another post for another time), and my reason for disliking the trend is that it becomes confusing who the messages are being posted by and seen by, and who is actually in our friends list, etc.  I also don't like how it combines both names together, without an "and" or something similar (it makes Jane look like John's middle name), and I don't like that if you were previously friends with one or both of the newly weds, you may have to re-friend them depending on how they go about making the newly-merged accounts.  And let's not even talk about divorces, and how that all plays out when the accounts have to be split... I can't imagine how that will work!

Instead, I think Facebook ought to promote the idea that married couples, if they want to have merged information, ought to create a Facebook page that represents their marriage, such as The John and Jane Doe Couple, or John and Jane are Hitched! page.  Assign both members of the marriage to be admins of the page, and both will be able to post as the page name and also receive posts from friends who post to the page directly.  Friends of the couple can also "like" the page to show their support or to receive updates on what they are up to as a couple, while letting those who only want individual updates from one of them to receive them through the husband's or wife's individual account.

There are many other benefits to this as well.  The page idea could be expanded to represent a family if the couple begins having children.  And in cases of divorce (which I hope never happens for my friends), the page can be dealt with or split up much easier.  If a couple doesn't want to create a page, they can always create an open or closed group relating to their marriage.  There are a few less things you can do with a group than you can with a page, but it is also an option.

Anyway, it's just something I've noticed happening more often and so if you're thinking of doing it yourself, hopefully some of the reasons I've given will help you change your mind.  What do you think?  Have a differing opinion?  Post a comment below.

UPDATED: Who Will Be Google Fiber's Next City of Choice?

Update: We were right, Google Fiber announced today on 03/24/2015 that Google Fiber will be made available in Salt Lake City, Utah. More details to follow. Below are the arguments we previously made about why Google Fiber should look at Salt Lake City next nearly two years ago.

Google Fiber just announced today that they will be moving to a third city by the end of 2013.  In the announcement, they stated that if the deal goes through, they will be acquiring the fiber network infrastructure that made up what used to be iProvo - a municipal fiber internet network that was created for residents in Provo, Utah.

Since I first learned about Google Fiber, I figured it would be a good fit for them to look for under-utilized fiber networks, many of which are municipal networks.  (Which it turns out is basically what they do)  It really came as no surprise to me that Google would pick a network like iProvo, in a city like Provo, Utah, because the fiber is there, the customers are there, but for whatever reason (I chalk it up to municipalities not knowing how to get the word out about the offerings of the service), the amount of subscriber growth never seems to keep up with the costs of operating and expanding the network.

So it made sense to me to think that Google would first be interested in these downtrodden networks, many of which are under fire because the cities that invested in them are not getting the full benefit that was promised when they were proposed and constructed.  Take a desperate former network operator like the City of Provo and match them up with the 1 Gbps offering Google Fiber, and it seems like you have a win-win.

Which may make one of the next "cities" that Google Fiber announces seem a bit different than what we've seen so far.  To this point, the cities announced have not been relatively close.  Kansas City is not near Austin, TX, and Provo, UT is not near either of those.

But the cities of Orem, Murray, West Valley, Midvale, Brigham City, Centerville, Layton, Lindon, Payson and Tremonton, Utah, are all relatively close to Provo.

Am I crazy?  Why would these cities possibly be on the list to be next for Google Fiber, when they are near Provo, and are all suburbs of larger cities such as Salt Lake City?  I think the answer is simple.  It is because of a municipal fiber network that has been struggling for over six years to keep it's subscribers, partner cities, and others in the State of Utah happy.  That network is called UTOPIA, and I have thought for some time that it is a prime candidate for Google to pick up for its expansion of Google Fiber.  For all intents and purposes, UTOPIA and iProvo are almost identical in how they were set up, using similar revenue, subscriber, and provider models.  In fact, both of them use the "wholesale" model, where the network itself provides the venue for multiple providers to offer services.

Yet, like iProvo, UTOPIA has struggled to gain users, even though for much of the six or seven years it has been available in it's partner cities, it has had higher speed offerings at lower cost than the major competitors in the land:  Comcast (Xfinity) and Qwest (CenturyLink).  For a while, I was able to use UTOPIA at home and it was great.  At that time in 2006-2007, I constantly received 40 Mbps download for about $40 per month.  That was back six years ago.  Speeds on Comcast in Salt Lake County have just barely begun to reach 40 Mbps, and the full cost of that internet service is around $60.

I would imagine that every mayor of those 11 partner cities of UTOPIA are talking about the Google Fiber acquisition of iProvo, talking to the mayor of Provo, and wondering if that is the same course of action they should take.  And I wouldn't even be surprised if talks with Google have occurred. (although they say they have not).

Speaking of which, as I searched for some information on UTOPIA's website, I came across a headline in the Salt Lake Tribune that was published today that reads: Executive of troubled UTOPIA sees hope in Google Fiber deal.

While, ultimately, UTOPIA cities may not agree to the terms necessary to complete a sale to Google of the infrastructure, at least for the time being, under the "wholesale" service model, I don't see why Google Fiber couldn't work a deal to at least be a carrier on the network, and sell the 1 Gbps service as well as their other service tiers since the UTOPIA network already has that capability.  Especially since they will already have an office in Provo where they are running iProvo.  Eventually, a buy out or a significant stake in the ownership of the UTOPIA fiber could then be negotiated.

This already fits into Google Fiber's apparent strategy, as they have been buying "dark fiber" for years, and recently leased more fiber in Kansas City.  That municipal network, called LINKCity, has also had similar issues that iProvo has had, and that makes them also somewhat similar to UTOPIA.

In some cases, leasing fiber first, rather than owning it outright, could be a great secondary strategy to bolster their footprint where networks like UTOPIA are already being rolled out, without having to put up their own money upfront.  Some estimate that it would cost Google over $11 Billion of their own cash to roll out their own network nationwide --a cost they can definitely lower if they lease some of their fiber network while awaiting momentum gains to offset costs.

It will also be interesting to see what the big competitors do in the surrounding areas of Provo and in Salt Lake County, with Google Fiber coming to their back door.  Will they scoff and shrug it off, or will they try to beat Google to offering faster speeds in those surrounding cities?  AT&T promised Austin a competing 1 Gbps service following Google Fiber's announcement in that city.  Stay tuned.

How To Get Rid of Pennies Without Paying Fees or Rolling Coins

If you're like me and most Americans, you probably have pennies and other coinage lying around that  you may feel is quite useless.  And we've all seen the penny counting machines that charge a fee to process them, such as CoinStar, or the coin rolls you must use to deposit them into the bank.

If you've decided it is time to stop storing these monies in your couch, seat cushions, under the driver's seat, in the piggy bank, or that glass mason jar, now might be a great time to use your money while completing your spring cleaning.

But who wants to take the time to roll coins, stand in a bank like, or wait for a coin counting machine to process all of the coins and charge a fee, when you can immediately use your coins for purchases for free?

And, no, I am not speaking of taking an embarrassing bag of coins up to a cash register...annoying a sales clerk in the process (like Cramer so famously did in Seinfeld).

What I am suggesting is a split payment.  Many automated checkout kiosks make this a cinch!  And the great thing is, you don't need to worry about how much coinage you have or carrying exact change.  Just bring in 30-40 cents or so (maybe 20 cents if all pennies) to the store each time you go shopping.  When checking out, choose the cash option and deposit your coins and pennies.  Your balance due is now decreased by 20, 30, or 40 cents.  Now choose credit/debit and put the remaining balance on your card.  Congratulations! You now used your 'useless' coins and paid no fees or rolled any coins.

You can do the same thing at most registers with a clerk, but they may be less willing to split the payment, so be aware of it and look for a machine checkout system.  (Most that I have run into don't care, though, and will do it.)  Additionally, do you see why it doesn't matter whether or not you have exact change?  If your balance due is $41.56, and you bring in $0.30 and deposit that first, you easily put the remaining $41.26 on your card, taking advantage of the fact that cards make dealing with any cents easy regardless of the number.  

Soon, you will be rid of your excess coins, and will have saved a bit from being debited from your bank as well, all with very little effort and time taken to do so.

And now, a proposal...

Many retailers are finally starting to send receipts to your email account of choice!  So, why don't retailers and credit/debit card processors come up with a way that change can be dealt with electronically?  For example, say $20 cash is used to make a $13.46 sale.  Why couldn't the clerk swipe the $0.46 to a bank card, or to a special purpose, industry standard 'coin card', that works like a sort of digital coin purse and can be used like a credit/debit card for later purchases?