## Tuesday, July 08, 2008

### How to reduce petrol and gas price..Egg logic

SENT TO ME BY A FRIEND:

A man eats two eggs each morning for breakfast. When he goes to the grocery store he pays 60 cents a dozen. Since a dozen eggs won't last a weekhe normally buys two dozens at a time. One day while buying eggs he notices that the price has risen to 72 cents. The next time he buys groceries, eggs are 76 cents a dozen.

When asked to explain the price of eggs the store owner says, 'The price has gone up and I have to raise my price accordingly'. This store buys 100 dozen eggs a day. He checked around for a better price and all the distributorshave raised their prices. The distributors have begun to buy from the huge egg farms. The small egg farms have been driven out of business. The huge eggfarms sell 100,000 dozen eggs a day to distributors. With no competition, they can setthe price as they see fit. The distributors then have to raise their prices to t hegrocery stores. And on and on and on.

As the man kept buying eggs the price kept going up. He saw the big egg trucks delivering 100 dozen eggs each day. Nothing changed there. He checked out the huge egg farms and found they were selling 100,000 dozen eggs to thedistributors daily. Nothing had changed but the price of eggs.

Then week before Thanksgiving the price of eggs shot up to \$1.00 a dozen. Again he asked the grocery owner why and was told, 'Cakes and baking forthe holiday'. The huge egg farmers know there will be a lot of baking going on andmore eggs will be used. Hence, the price of eggs goes up. Expect the samething at Christmas and other times when family cooking, baking happen.

This pattern continues until the price of eggs is 2.00 a dozen. The man says, ' There must be something we can do about the price of eggs'. He starts talking to all the people in his town and they decide tostop buying eggs. This didn't work because everyone needed eggs.

Finally, the man suggested only buying what you need. He ate 2 eggsa day. On the way home from work he would stop at the grocery and buy two eggs. Everyone in town started buying 2 or 3 eggs a day.

The grocery store owner began complaining that he had too many eggsin his cooler. He told the distributor that he didn't need any eggs. Maybe wouldn't need any all week. The distributor had eggs piling up at his warehouse. He told thehuge egg farms that he didn't have any room for eggs would not need any for at least two weeks.

At the egg farm, the chickens just kept on laying eggs. To relieve the pressure, the huge egg farm told the distributor that they could buy the eggs at a lower price. The distributor said, ' I don't have the room for the eggs even if they were free'.

The distributor told the grocery store owner that he would lower the price of the eggs if the store would start buying again. The grocery store owner said, 'I don't have room for more eggs. Thecustomers are only buying 2 or 3 eggs at a time. Now if you were to drop the price of eggs back down to the original price, the customers would start buying by the dozen again'.

The distributors sent that proposal to the huge egg farmers but theegg farmers liked the price they were getting for their eggs but, those chickens just kept on laying. Finally, the egg farmers lowered the price of their eggs. But only a few cents. The customers still bought 2 or 3 eggs at a time. They said, 'when the price of eggs gets down to where it was before, we will start buying by the dozen.'

Slowly the price of eggs started dropping. The distributors had toslash their prices to make room for the eggs coming from the egg farmers. The egg farmers cut their prices because the distributors wouldn't buy at a higher price than they were selling eggs for. Anyway, they had fullwarehouses and wouldn't need eggs for quite a while. And those chickens kept on laying.
Eventually, the egg farmers cut their prices because they were throwing away eggs they couldn't sell.

The distributors started buying again because the eggs were priced to where the stores could afford to sell them at the lower price. And the customers starting buying by the dozen again.

Now, transpose this analogy to the gasoline industry. What if everyone only bought \$10.00 worth of gas each time they pulledto the pump? The dealer's tanks would stay semi full all the time. Thedealers wouldn't have room for the gas coming from the huge tank farms. The tank farmswouldn't have room for the gas coming from the refining plants. And therefining plants wouldn't have room for the oil being off loaded from the hugetankers coming from the oil fiends.

Just \$10.00 each time you buy gas. Don't fill it up. You may have to stop for gas twice a week but, the price should come down. Think about it.

As an added note...When I buy \$10.00 worth of gas that leaves my tanka little under quarter full. The way prices are jumping around, you can buygas for \$2.65 a gallon and then the next morning it can be \$2.15. If you have yourtank full of \$2.65 gas you don't have room for the \$2.15 gas.

You might not understand the economics of only buying two eggs at atime but, you can't buy cheaper gas if your tank is full of the high priced stuff. Also, don't buy anything else at the gas station; don't give the many more of your hard earned money than what you spend on gas, until the prices comedown.' Just think of this concept for a while.

zhummmeng said...

Mr. Tan, this is a supply and demand theory.You can control both supply and demand and it will end up an equilibrium which is the price you think it is fair to pay. You can apply this to any thing even to whole life insurance sale. Imagine all consumers switch to terms it will become not viable to sell whole product. The problem is in order for it to work it requires a perfect competition condition where all buyers and sellers are in one place and there is no difference between the products and the price is known to everyone.There is complete transparency. It requires cooperation. Is this possible?
In real life whole life will continue to sell as long there are buyers. You can see from your blog, from time to time you have someone raising a whole life product issue despite so much negatives have been written about it in your blog. Not even mass education can do it because not everyone can be educated, there bound to be skeptics and oppositions to destablize the equilibrium.

sarpork said...

i don't like the oil industry.
they are monopolistic
and they can justify their increase in prices by saying that costs has increased.

it's very bad when price is determined by cost instead of competition....

because cost can be easily manipulated by the industry.

ditto for our public transport.

1. eggs are renewable, gas are not. and further, unlike other commodities, gas are not recyclable. once it is used, it is gone, forever. since the amount of crude oil out there will NEVER increase (in human time scale, anyway), it is impossible to bring the price down over a long term. our consumption of it in the past WILL affect the price of it NOW.

2. it is impossible to make the chickens stop laying eggs, but it is a simple matter for gas companies to stop pumping when they see they are exceeding demands (and this is exactly how OPEC works). we are screwed in any case.

3. people have individual interest to fill up their tanks. this is not when you can realistically expect common people to sacrifice short term gain for greater good. they are seeing the price increasing day to day, and they will do exactly what they think is the most profitable. if they can have huge tanks in their houses, they will try fill them up.

Gary Chang said...

interesting economics !!! In Singapore context, even if petrol prices fall, the "saving" will be quick pass to paying even higher ERP charges coming our ways...

Ao said...

i think the way to reduce oil prices is when someone found an alternative to oil.

either that or people ditch their cars for public transport.

since the demand is still there, and the time difference to refuel the car, be it semi full or full tank is short, i don't think it would make a difference by refuelling when 'there is a need to'.

Jeremy said...

A very creative solution to the oil problem.

However, I think its quite unlikely to work because:

1. The fundamental demand is not changed. Taken over a longer period, the average consumption is still the same. Therefore the equilibrium price will still be the same.

2. The proposal hinges on the fact that there is a temporal insufficient supplier storage space. A simple calculation shows that this is not true with the oil industry today

Calculation: The objective is to calculate the amt of storage squeeze if all drivers top up what they need daily, instead of a full tank each time. If this storage squeeze is only a small fraction of what the oil industry has in storage space today, the method will not work.

To calculate, assume initially that all drivers filled full tank once a week. On average, at any point in time, the oil storage in all drivers would be half a tank. Now, if everyone tops up only what he needs daily, then the average oil storage in all drivers at any point in time would be reduced to (1/2)*(1/7) = 1/14 tank. So the additional storage squeeze to the supplier would be 1/2 - 1/14 = 3/7 tank. This is equivalent to 3 days worth of petrol for all vehicles.

Fortunately, or unfortunately, the oil-producing countries have months, if not years of oil reserves that are kept in storages. 3 days compared to months of potential storage is insignificant for the suppliers to feel a squeeze and reduce prices.

Everlearning said...

The problem is not so much of speculation as I see the present oil price crisis. It is more likely that oil has reached its peak. Before other energy alternatives are found, the price is still going up because of a demand for it for industralisation.
We just have to learn to conserve energy, and prepare for stagflation. Unless, more oil fields are discovered, there is no way that this whole mess is going to clear up. Our world natural resources are depleting, climatic changes are unpredictable and conservation must step in sooner than we ought to think. I recommend this site: http://sgentropy.blogspot.com

yokoosi said...

just a thought, what happen to the other two companies if say all the cars in Sigapore just filled up with ONE particular company. Imagine the amount of revenue lost per day for the other two. In this way, we can force them to really "Compete"

David said...

Even if the logic can work, how to get so many people to cooperate without threat or force? If can, that person will be a great politician and elections, if free and fair sure win one.
Maybe after Mr Tan's posting this may happen. Haha!

yokoosi said...

agree that we need someone to coordinate. Mr. Tan is a good choice. Remember how he managed to gather the signatures on the NTUC issues?

We blend into each other's life said...

Egg and Oil are just different.

You can get egg as long as you have a chicken.

Egg can be reproduce and replace easily.

But oil is a depleting resource it cannot be reproduce and replace so easily like an egg.