While the so-called ‘hot gas’ issue has been discussed here several times before, there are new developments out in California that have Oil Watchdog and the $295/hr lawyer behind this ‘consumer organization’ crying over lost litigation opportunities. Given the time, effort, and money they have put into this issue, the events described in this essay are quite a blow for them.
At least they will now have more time to devote to their other campaigns, such as 1). Stopping oil companies from donating money to universities; and 2). Berating oil companies for not giving enough to universities. (They make more sense if you view them as a satirical site along the lines of The Onion. The only problem is that Oil Watchdog is trying to be serious). I think it is particularly curious that the press uncritically accept and quote those associated with Oil Watchdog as consumer advocates trying to do the right thing by consumers, when a cursory investigation would show what they are (hypocritically) up to.
First, here are a few of the links to previous discussions of the issue:
In a nutshell, the issue is that gas expands when the temperature is warm, and so a gallon of ‘hot’ gas has less energy than a gallon of cooler gas. This means you aren’t getting the same amount of energy from your gasoline that is hot, therefore “you are being ripped off.”
This is the kind of issue that an organization like Oil Watchdog was built for. They can hype up the controversy, get outraged people to send them donations (after all, who is going to protect the little guy from Big Oil if not them?), and try to get some litigation going to benefit people like the professional litigator who is behind the site. His own website says that he “has focused on suing insurance companies that overcharge or mistreat consumers, in violation of state laws; cell phone companies for billing mistakes and poor service; and HMOs and health care companies for providing shoddy health care and refusing to pay people’s claims.” Just imagine the potential windfall if he can get a class action going by convincing enough people that deep-pocketed Big Oil is overcharging and mistreating them. That would certainly earn him more money than 99.99% of the “greedy” people in the oil industry.
Oil Watchdog – a spin-off of the Foundation for Taxpayer and Consumer Rights (see this story for the dirt on why they do what they do and evidence of who is behind the site) – has fought to force installation of temperature compensating equipment so that the gallon is corrected for temperature. That means when the gas is warm, you get a little more than a gallon, but when the gas is cold you get less. So what’s wrong with that? Basically, as I discussed at the links above, it belies a real misunderstanding of just what the outcome would be.
Imagine for a moment that you redefine a gallon so that the new volume is now equivalent to 1.5 of the old gallons. Do you think the price for a gallon of gasoline would stay the same? Of course it wouldn’t. You would pay 1.5 times as much for it. This is what Oil Watchdog and others pushing for this legislation could never absorb: It wasn’t going to work as they claimed, because as soon as the size of the gallon changes (which is what temperature compensation does), the price will change. You would probably find more variation in energy content just based on how the gasoline is blended. (Imagine how outraged they will be when they finally figure out that ethanol is contributing to gasoline with lower energy density, or that energy density varies between summer and winter.)
Oil Watchdog has really been on top of this issue, issuing press release after press release to make sure everyone knew how badly consumers were getting ripped off. Yet despite all that effort, the California Energy Commission has ruled against them:
This is of course what I have been saying since this issue first cropped up. From the article:
The California Energy Commission says forcing retailers to install temperature-compensation devices on fuel pumps would drive up the price.
Officials with the Owner-Operator Independent Drivers Association challenge that claim, saying a one-time investment by fuel companies is part of doing business and would save consumers money in the long run.
During a business meeting Wednesday, March 11, the California Energy Commission recommended against forcing retailers to implement automatic temperature compensation, or ATC, at the pump.
Retail fuel is currently sold as a 231-cubic-inch gallon and does not take temperature into account. Elementary physics shows that all liquids expand and contract with temperature changes.
State and federal law does not require fuel retailers to compensate for temperature, but consumer groups and some lawmakers are trying to change that.
Directed by state law AB868, the California Energy Commission studied fuel temperature and evaluated the cost of implementing ATC at retail pumps.
“If retail station owners and operators continue (are) to grow and remain profitable, then retail station owners will most likely raise their fuel prices to compensate for selling fewer ‘gallons,’” commissioners wrote in the report. “If this is the case, then expected benefits for retail motorists will be essentially zero.”
Oil Watchdog of course wasn’t going to take that lying down, so they have issued a series of press releases charging conflicts of interest and anything else they think will stick (and draw attention away from all of their donors’ money they wasted on this). Here was their latest press release on the issue:
Personally, I think that’s too subtle, but what do I know? I am not an ace journalist like the staff at Oil Watchdog.
As I have documented previously, Oil Watchdog started censoring comments following their stories because people were consistently demolishing their claims. Some of the comments are very good, though. So below I have copied one of those comments that Oil Watchdog conveniently put out of sight by default (and you will see why they started doing that). This is a typical sort of blistering rebuttal they often receive following some of their hysterical “essays”, which finally resulted in them frequently labeling those who disagree with them as “Shills for Big Oil.” What else were they going to do, debate the technical merits?
It is a bit long, but a highly entertaining example of what happens when an organization completely devoid of any technical people on their staff pumps out the misinformation they do. As the poster below points out, there seems to be no due diligence at all, but the reason for that becomes clear when one understands their actual objectives.
Oil Watchdog presents the hot fuel issue as one hoisted on the public by Big Oil. Without defining Big Oil, we have to assume she [Judy Dugan] means large refiners and integrateds, as opposed to retailers. Let’s examine the facts in this case, instead of the anecdotes.
The claim is that an annual $400,000,000 in excess revenue is generated dishonestly in California. As Oil Watchdog is clearly biased in this case (they are after all paid to criticize the oil industry), we can safely assume that this figure is probably at the very highest end of the impact spectrum. But let’s take it anyway, and break the figure down and see, to a reasonable approximation, just who is getting what from hot fuel. By the way, I’ll state here that the more accurately fuel can be dispensed, the better for consumers. But the real issue is, not what is the best technical solution, but whether consumers would benefit from ATC. Oil Watchdog sweeps the latter point under the rug and presents ATC purely as a morality play.
The simple analysis goes as follows:
$400,000,000: Oil Watchdog’s claimed ripoff. This is in the form of revenue to the retailers.
10% profit margin: we are here mixing refiners and integrateds, so it’s not a bad approximation. But we’ll reach the same conclusion below with any reasonable range of profitability assumptions.
$40,000,000: hot fuel profit to the industry.
Who is getting this? We know it only applies to the retail level (as Dugan has reported herself) since refiners sell their fuels corrected for temperature.
Here are the market shares of California refiners, as reported by the state of California:
Company CA Market Share, Gasoline
Big West 2%
New West 1%
Tower Energy 1%
In terms of industry concentration, this market does not look particularly concentrated when compared to other critical industries, such as automobiles, computers, or tires. So the case for conspiracy is weak on the basis of market share alone. At the level of the state of California, the Herfindahl Index for refining would be about 1300, well below the 1800 that might start getting attention at the Department of Justice. In fact, the DOJ considers industries in the range of 1000 to 1800 as being only “moderately concentrated.”
We now want to take the $40,000,000 hot fuel profit derived above, and allocate it to the state’s refiners. But first, as Dugan knows and has reported, we know that Big Oil has largely exited the retail sales business. In fact, she has quoted the widely published fact that about 97% of retail sales go to retailers, and not to Big Oil. So we need to allocate 3% of the $40,000,000, or $1,200,000, to Big Oil refiners by market share. When we do that we get the table below (here showing Big Oil shares).
Company Share of Hot Fuel Profit
Combined Retailers $38,800,000
Clearly, the benefit to Big Oil, by Dugan’s own figures, of hot fuel in California would not even cover the cost of a lawyer for each company. In short, Big Oil could really care less about hot fuel in terms of impact to the bottom line. ExxonMobil’s hot fuel take in California represented about 0.00018% of its total profit. It probably spends many times that on landscaping or office water coolers.
And just as clearly, we see that the retailers should have a vested interest in the outcome. But when you consider that there are about 12,000 gas stations in California, you find that
$38,800,000/12,000 = about $3200 annual hot fuel profit per gas station.
In other words, the average California station doesn’t appear to be getting a huge jolt from this either. I think we can safely assume that this is not a profit grab by Big Oil, or even the retailers: the retailer opposition is probably based more on avoidance of ATC costs and maintenance.
But the really interesting point to be made here is that on the one hand Oil Watchdog charges this group of retailers with fraud, but on the other hand claims that the retailers will now absorb the cost of the equipment and maintenance, to the benefit of consumers. What if Oil Watchdog is wrong, and the consumers end up behind in the long run? This strong possibility is essentially ignored. For reference, the average consumer, if he drives 15,000 miles per year and gets 20 mpg, is paying a little under $19 per year on hot fuel (based on the $400,000,000 divided by gallons sold in California, or 2.6 cents per gallon). What if the retailers pass along an average of 4 cents per gallon? Why not? Aren’t they conspiring to rip us off now anyway? After all, each retailer will know that his competitors are facing the same new expense. The whole episode would probably be a futile exercise in money laundering in which no one benefits. This is one of the reasons why the American Trucking Associations, the nation’s spokesman for the trucking industry, opposes ATC. Any charge that the ATA has a vested interest in higher fuel prices is not credible.
If the potential buyer of Judy Dugan’s $5000 used car finds a defect in the engine (perhaps a microscopic hole in a piston) that might cost him 8 extra gallons of gas per year (near our $19 hot fuel cost), and Dugan learns it will cost $500 to replace the piston, will it be a good thing for the buyer if she does that and charges him $5500? Dugan is, after all, selling a car which she knows has a hidden foot on the gas pedal. Or would she just negotiate a new price and let the market make the correction? Isn’t that in fact what retailers are doing? As the market shares above show, and as recent steeply falling gasoline prices have proven, the industry is competitive. Unless they conspire, it would seem that no one retailer could make incremental profit off hot fuel as long as a competitor somewhere was willing to cut into that profit to gain market share. The market will equilibrate to a rate of return acceptable to competing retailers. Introduce a retail cost perturbation into the system, as in ATC, and prices will tend to adjust to maintain that equilibrium margin, unless one believes that the retailers will now stop ripping us off and simply accept lower incomes.
One gets the sense that Oil Watchdog does not understand the concept of cost-benefit analysis, and instead subscribes to the simple belief that anything bad for the oil industry must be good for consumers. The representation of hot fuel as a willful fraud perpetrated by Big Oil, when Oil Watchdog has acknowledged that refiners deliver temperature corrected fuel to retailers, is negligent and cynical…. or just plain dishonest. There is an underlying perception that this issue is one of self-interest for Oil Watchdog, a feather in their cap so to speak, or perhaps justification for existence in a world where the recent steep drop in prices prove that oil companies cannot set those prices, thus muting many of Oil Watchdog’s past charges. The rug being pulled from under its feet, Oil Watchdog needs a new pretext for its sources of funding.
Now, Oil Watchdog may in fact be correct on this issue. There is a lot of uncertainty in the data and therefore conclusions on hot fuel cost estimates, and future market responses to ATC installation cannot be predicted with certainty. But they make no credible case, and reasonable calculations based on their own numbers raise legitimate doubts as to who really benefits. Unfortunately, instead of pursuing an impartial quantitative analysis, they turn ATC into a witch hunt and go after the usual suspects. Their motivation appears above all else to be giving the oil industry a black eye; consumer benefit is assumed, and not investigated. The possibility that they could be wrong, and therefore that they could be hurting consumers, takes a back seat. There does not appear to be any due diligence on Oil Watchdog’s part to demonstrate that their position on ATC would result in a net benefit to consumers.