I can’t believe this gas temperature thing is still an issue but apparently it’s even being investigated by congress. Either congress needs a lesson in economics or the media is misrepresenting their findings since apparently they found that the lack of compensation will cost the American consumer 1.5 billion dollars this summer. In my last post on the subject I argued that the hot gas issue shouldn’t make any difference because the extra profit the gas stations make just gives them extra room to lower the prices. You can look there for that argument here I want to address what appears to be the other side’s compelling argument: the gas industry must be swindling us because they install compensators in Canada and compensate on the wholesale market.

Let’s first deal with the wholesale market. Unlike the consumer market wholesalers set standard prices for a gallon of gas which apply throughout the country (or at least large regions). This means if they did not compensate for the temperature change gas stations in warm climes (and ultimately consumers) would end up shortchanged. The situation is different for gas retail where the price is set by your local gas station. If the gas stations in warm climates are giving less gas to the consumer per gallon that just means gas stations in those areas can price their gas more cheaply. In other words the local nature of the retail market lets them compensate for location based differences while the wholesale market does not. Also one needs to take into account the fact that the wholesale market needs fewer compensators and likely experiences greater variation in temperature (above ground trucks versus underground tanks) than the retail market.

Well then what about Canada? Now it could be that gas stations there follow a different model but for argument’s sake let’s assume they work like they do in the states. What could explain the fuel industry’s desire for temperature compensators in Canada? Well simple irrationality is always an option. The gas industry in Canada might very well have been tricked by the same kind of invalid arguments at work here. Another possible explanation is that the fuel is being sold at a temperature significantly above the average temperature in Canada. Thus by mandating temperature compensation the Canadian fuel industry probably reaped extra profits during the period of time it took consumers and the market to adjust to the decreased value in a gallon. Perhaps we could jigger up a one time transfer from gas stations to individuals in the US by setting the temperature standard to a lower than average temperature but likely gas stations would simply react faster when they need to change their prices to avoid losses rather than to minimize profits.

The ultimate proof that this is a false concern is that no one thinks the gas companies are being screwed over in the cold states like Minnesota or Maine. Should we compensate the gas companies in northern states out of tax dollars? If not why should gas companies compensate motorists in warm states?