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A possible way out to control the fuel inflation

  • Writing by Rajveer
  • On July 16th, 2008 at 11:11 am

This morning I received an e-mail from a friend describing a sensible logic to control the fuel rates. I think that it can be effective to control the fuel inflation in a country like India. Please read the post in case you have never come across to such ideas in your past. This idea seems to be really interesting and may be it can give some positive results also. So I decided to post this topic on my blog and have you guys also share your views on this. After you finish reading the post, in the end you can read my views that, why I think this eggs concept is slightly different than fuel field. But still I would say it is worth giving a read :-)

Let’s take a very easy example which is a part of the life of almost every one of us. A man needs two eggs each morning for breakfast.  He pays Rupees 12 one dozen eggs and he prefers to purchase more than one dozen of eggs at a time since lesser than that won’t last for a complete week. One day while buying eggs he observes that price of the eggs is raised suddenly and now one dozen eggs costs Rupees 16. Again next time he buys foodstuff and eggs are for Rupees 22 a dozen.

When he questioned to the store owner he was replied that, “The price has gone up and I have to raise my price accordingly”. His store buys 200 dozen eggs a day and he checked around for a better price but all other distributors have also raised their prices. The distributors have begun to buy from the huge egg farms hence the small egg farms have been driven out of business as they can not compete with bigger farms. The huge egg farms sell 100,000 dozen eggs a day to their distributors.  Without any opposition, they are able to decide the price of eggs by their own wish. Same way the then distributors also have to raise their prices to the food stores. And the process follows on the same way by increasing the price more and more to make some profit margin in between.

When people kept buying eggs the same way the price also kept going up. He saw the big
egg trucks delivering 200 dozen eggs each day and nothing changed there. He checked out the huge egg farms and found they were selling 200,000 dozen eggs to the distributors on daily basis. Apart from the prices kept going up for the eggs nothing had changed.

On the top of that, before the big festive season the egg price reached to Rupees 40 a dozen. Again he asked the food shop owner why and he was told, “Cakes and baking for the holiday”.  The huge egg farmers know there will be a lot of baking going on and more eggs will be used so the price of eggs goes up. This pricing process continues until the price of eggs is Rupees 60 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 to stop buying eggs. This didn’t work because everyone needed eggs. Finally, the man suggested only buying what you need. On the way home from work he would stop at the grocery and buy two eggs daily. Everyone in town started buying eggs only as much as they needed per day. The food shop owner started complaining that he had too many eggs.  He told the distributor that he didn’t need any eggs until the pending stock goes off. Maybe wouldn’t the next delivery until next week.

The distributor had eggs piling up at his warehouse.  He told the huge egg farms that he didn’t have any room for eggs so he would not need any for at least for next 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 enough space for more eggs even if they were free”. Same way the distributor told the grocery store owner that he would lower the price of the eggs if the store would start buying again as per the earlier quantity. The grocery store owner said, “I don’t have room for more eggs. The customers are buying only 2 or 3 eggs at a time.  May be if you drop the price of eggs back down to the original price, the customers would again start buying by the dozens”.

The distributors sent that proposal to the huge egg farmers but the egg 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 with a few margin.

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 to slash their prices to make room for the eggs coming from the egg farmers. The egg farmers had cut their prices because the distributors wouldn’t buy at a higher price than they were selling eggs for. So they had full warehouses 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. The customers started buying by the dozen again.

Now, swap this example to the gasoline industry. Can this help stop the inflation?

What if everyone only buys Rupees 200.00 worth of Petrol each time they are pulled to the pump?  The dealer’s tanks would stay semi full all the time. The dealers wouldn’t have room for the petrol coming from the huge tanks.  The tank farms wouldn’t enough have room for the petrol coming from the refining plants. And the refining plants wouldn’t have room for the oil being off loaded from the huge tankers coming from the oil fiends.

Just don’t simply fill up the tank of your car. You may have to stop for gas twice a week, but the price should come down one day. Think about it. Also don’t buy anything extra at the fuel station, don’t give them anything more of your hard earned money than what you spend on petrol, until the prices come down…”

My views on eggs vs fuel inflation logic

Eggs can be available in spare but regrettably the petroleum products are not. I believe that reason behind continues rise in fuel prices is more because of shortage which cause a difference between demand and supply. In the case of eggs demand and supply difference is more because of the mediators involved.

7 Responses

  1. Kavita July 16th, 2008 at 8:44 pm

    This is a good article with lots of Info.

  2. Kumar July 16th, 2008 at 11:07 pm

    I definitely agree that inflation is basically a cause of demand > supply. This causes the market to inflate to gain bigger profits. One likes to earn and earn it better as and when market expands. We have seen that happening every days around us, not just Oil.You demand a fruit continously from a vendor, or look for a property, you would find prices soaring because demand set out is more from what it was some time back.

    The “out of proportion” grabbing up/piling of stuff at home is hurting yourself when thyself doesnt recognizes it sooner.

    Other repercussions of grabbing more than what is required : I cite an example :
    I rememeber an incident when a friend used to tank-full his car and it got stolen from market. The very first question police asked : how much petrol car had? He proudly replied : Tank Full.

    Police replied : then it must have too far without stopping anywhere. If it has stopped anywhere to fill petrol, we could have traced from petrol pimps.

    On a lighter note, point well taken and would try to practice

    Cool post !!

  3. anand sagar July 16th, 2008 at 11:26 pm

    I doubt, this will not have much effect on oil price as price hike is driven by artificial manipulating market. Consumer spending in oil has not double in 1yr but price of oil has increase more than double.

    This is more of speculation done by financial group. They have to do so to avoid an economic collapse of US. The direct reason for the oil to jump from $70 to $130 is because Iran abandons US dollars as oil trade currency. To block that petro-dollar going back to US, they have to raise the oil price.

    US/China are hoarding oil for future. US have close down some oil well (kept its natural resouce for future use)… Same goes with steel. Chinese government has asked to import steel for olympic. (reserve natural resouce for future use).

    This is high level planning by develop countries.

  4. Rajveer July 17th, 2008 at 12:51 am

    Kumar – Thank you for your valuable inputs and to add one more wise reason to refrain from the habit of keeping our car tanks always filled unless it is actually required.

    Anand – Thanks! I think you are right and even I suspect that these things are planned and obsessed on a very high level by the developed countries. But still I would say what if we imagine the big picture – think about the billions of people who keep their car tanks filled always. What if every single one of them just do it on daily basis. I think in such case it would definitely play a positive role by affecting the main cause of high level planning which causes the fuel inflation .

  5. anand July 21st, 2008 at 10:50 pm

    Suppose each person is spending Rs 1000 per week ( whether he buys daily worth 200 or at one go in a week ) And let Pump dealer is catering 10 person in a week ( total he earned 10000) So for the whole week demand supply remain same irrespective of how much you buy.

    Even if all 10 persons fill their tank(Rs 1000) on Monday no one will turn up by next week so to whom petrol pump owner will sell.

    P.S Oil is a commodity so its price “mostly” depend on supply demand ratio So better is to cut on your demand.

    Oil is not perishable commodities like egg.

  6. Rajveer July 22nd, 2008 at 1:31 am

    Hey Anand, may be you are right so we should settle with the fact that Petrol pumps don’t control the price of gasoline, oil companies do.

  7. Sagar June 16th, 2009 at 6:01 pm

    Well I do agree with Rajveer here….

    Except for the fact that when I have a dozen of eggs available I pamper myself with a double omlette and a bulleye topping….if i had just one i would’ve had no options :(

    The same applies for gas too… when in deep red i always take the shortest route and have mercy on the engine at lights…but when in green do i really care :)

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