1 00:00:00,800 --> 00:00:03,440 Speaker 1: You know the feeling you pull up to the gas station, 2 00:00:03,720 --> 00:00:05,760 Speaker 1: you know that oil prices have ticked up a bit, 3 00:00:06,120 --> 00:00:10,280 Speaker 1: and bang, the price sign has already changed. Then oil 4 00:00:10,320 --> 00:00:13,640 Speaker 1: prices come back down a few weeks later, and somehow, 5 00:00:13,640 --> 00:00:17,319 Speaker 1: the relief that lower price it just floats in like 6 00:00:17,400 --> 00:00:27,720 Speaker 1: a feather. This isn't just some random gripe. It's in 7 00:00:27,760 --> 00:00:31,000 Speaker 1: the news right now. Oil prices have been bouncing around 8 00:00:31,080 --> 00:00:34,760 Speaker 1: and Donald Trump just jumped on social media to accuse 9 00:00:35,000 --> 00:00:38,200 Speaker 1: the oil companies of not cutting gas prices fast enough. 10 00:00:38,479 --> 00:00:42,120 Speaker 1: He's called it price garging. Now that's a serious charge. 11 00:00:42,479 --> 00:00:45,640 Speaker 1: But before we decide who the villain is, let's start 12 00:00:45,680 --> 00:00:48,199 Speaker 1: by understanding that for no one and itself, you've got 13 00:00:48,200 --> 00:00:51,560 Speaker 1: to live with it every day. Because, mate, if you've 14 00:00:51,600 --> 00:00:54,319 Speaker 1: had the feeling that gas prices go up fast and 15 00:00:54,520 --> 00:00:58,800 Speaker 1: come down slow, you're not imagining it. Economists have been 16 00:00:58,840 --> 00:01:01,880 Speaker 1: studying this for decades. We've even got a name for it, 17 00:01:02,080 --> 00:01:05,959 Speaker 1: Rockets on the way up and feathers on the way down. 18 00:01:06,440 --> 00:01:08,720 Speaker 1: The pattern's real. It shows up in lots of places 19 00:01:08,760 --> 00:01:12,240 Speaker 1: over lots of years. But it can arise for several 20 00:01:12,360 --> 00:01:16,440 Speaker 1: different reasons. Some of them are pretty ordinary, others are 21 00:01:16,480 --> 00:01:19,759 Speaker 1: more worrying. So here's my plan for today. Does this 22 00:01:19,880 --> 00:01:23,119 Speaker 1: really show up and the data? Is this an empirical regularity? 23 00:01:23,600 --> 00:01:26,759 Speaker 1: Then let's get into it and ask why might it happen? 24 00:01:27,280 --> 00:01:30,200 Speaker 1: And finally, what does that all tell you? And what 25 00:01:30,240 --> 00:01:32,880 Speaker 1: doesn't it tell you when you're standing at the pump. 26 00:01:33,800 --> 00:01:37,360 Speaker 1: So let's start with the actual claim. Nobody's saying that 27 00:01:37,400 --> 00:01:40,959 Speaker 1: gas prices never fall. Of course they fall. The claim 28 00:01:41,040 --> 00:01:44,240 Speaker 1: is about how quickly when oil, which is a major 29 00:01:44,360 --> 00:01:47,400 Speaker 1: ingredient of gas, goes up, how fast does that show 30 00:01:47,480 --> 00:01:49,760 Speaker 1: up for you at the gas pump? And then when 31 00:01:49,800 --> 00:01:52,960 Speaker 1: oil prices go down, how fast does that show up 32 00:01:53,240 --> 00:01:56,000 Speaker 1: at the pump. That's the whole question for today, and 33 00:01:56,040 --> 00:01:59,480 Speaker 1: it's a good question because people really do notice oil 34 00:01:59,560 --> 00:02:02,720 Speaker 1: drops uply, there's sign barely budgets, and suddenly it feels 35 00:02:02,760 --> 00:02:07,200 Speaker 1: like someone somewhere is pocketing the difference. Now, look, I 36 00:02:07,200 --> 00:02:10,279 Speaker 1: don't want to jump from that feeling straight to a prosecution, 37 00:02:11,080 --> 00:02:12,919 Speaker 1: but I don't want to wave it away either, because 38 00:02:12,960 --> 00:02:15,880 Speaker 1: economists have measured this for a long time, and one 39 00:02:15,960 --> 00:02:19,880 Speaker 1: finding keeps showing up across a whole big literature. Retail 40 00:02:19,960 --> 00:02:24,520 Speaker 1: gas prices are often super responsive when crude oil prices 41 00:02:24,520 --> 00:02:28,359 Speaker 1: are rising, but they're not anywhere near as responsive when 42 00:02:28,360 --> 00:02:31,519 Speaker 1: they're falling. That's what we call the rockets and fairness pattern. 43 00:02:31,960 --> 00:02:34,480 Speaker 1: So this isn't just a question of good blokes and 44 00:02:34,520 --> 00:02:37,520 Speaker 1: bad blokes. It's a question of timing. Does bad news 45 00:02:37,800 --> 00:02:40,960 Speaker 1: travel through the system faster than good news? That is 46 00:02:41,000 --> 00:02:44,040 Speaker 1: something we can actually test. Okay, mate, So I had 47 00:02:44,080 --> 00:02:46,880 Speaker 1: stay to go fetch the weekly oil and gas price 48 00:02:47,000 --> 00:02:51,519 Speaker 1: numbers for me. I grab weekly US retail gasoline prices 49 00:02:51,520 --> 00:02:54,360 Speaker 1: from the EIA. That's the price they survey at the 50 00:02:54,360 --> 00:02:58,079 Speaker 1: pump first thing every Monday, and I lined up each 51 00:02:58,120 --> 00:03:01,720 Speaker 1: of those Monday pump prices again the previous week's average 52 00:03:01,720 --> 00:03:04,480 Speaker 1: crude oil price. Why the previous week, Well, because the 53 00:03:04,480 --> 00:03:07,280 Speaker 1: pump can only react to oil price changes that have 54 00:03:07,320 --> 00:03:10,040 Speaker 1: already happened. So we match this Monday's gas price to 55 00:03:10,080 --> 00:03:12,280 Speaker 1: the crew that came before it. The idea is simple. 56 00:03:12,280 --> 00:03:13,959 Speaker 1: What we want to do is take the weeks when 57 00:03:14,080 --> 00:03:17,240 Speaker 1: crude oil rose and separate them from the weeks when 58 00:03:17,280 --> 00:03:20,000 Speaker 1: crude oil fell. Then ask how much of each of 59 00:03:20,040 --> 00:03:22,920 Speaker 1: these movements showed up in gas prices at the pump 60 00:03:23,000 --> 00:03:26,639 Speaker 1: over each of the following weeks. That's the test nothing fancy. 61 00:03:26,720 --> 00:03:31,359 Speaker 1: We're just asking whether bad news travels faster than good news. 62 00:03:32,800 --> 00:03:35,040 Speaker 1: If you look at the data, the broad pattern, in 63 00:03:35,040 --> 00:03:38,680 Speaker 1: fact looks pretty familiar. Crude moves and then gas prices follow. 64 00:03:39,080 --> 00:03:41,440 Speaker 1: So specifically, I'm going to look at how gas prices 65 00:03:41,520 --> 00:03:44,560 Speaker 1: move over each of the eight weeks following a rise 66 00:03:44,600 --> 00:03:47,200 Speaker 1: in crude oil prices, and then how they move over 67 00:03:47,240 --> 00:03:50,360 Speaker 1: each of the eight weeks following a fall in gas prices. 68 00:03:50,760 --> 00:03:54,320 Speaker 1: Here's the punchline. When the price of crude oil rises, 69 00:03:54,400 --> 00:03:56,600 Speaker 1: the price at the pump, the gas price catches up 70 00:03:56,720 --> 00:03:59,720 Speaker 1: really quickly. Most of the move lands within a week 71 00:03:59,800 --> 00:04:03,160 Speaker 1: or but when the price of crude oil falls, the 72 00:04:03,200 --> 00:04:05,560 Speaker 1: relief shows up a lot more slowly. It dribbles in 73 00:04:05,840 --> 00:04:08,640 Speaker 1: over the following weeks. So yeah, we just confirmed it. 74 00:04:08,760 --> 00:04:11,240 Speaker 1: You and I. Gas prices rise like a rocket and 75 00:04:11,280 --> 00:04:14,880 Speaker 1: they fall like a feather. But give it a couple 76 00:04:14,920 --> 00:04:17,120 Speaker 1: of months, and I think this part's important, and the 77 00:04:17,160 --> 00:04:20,720 Speaker 1: two roughly even out. Eventually the feather does land. So 78 00:04:21,120 --> 00:04:24,880 Speaker 1: this asymmetry, it's almost entirely about speed. It's not about 79 00:04:24,920 --> 00:04:28,760 Speaker 1: whether the gas station pockets some permanent cut. So the 80 00:04:28,880 --> 00:04:31,440 Speaker 1: data have told us the pattern's there. The much harder 81 00:04:31,520 --> 00:04:34,960 Speaker 1: question is why is it there? Hey, That's where the 82 00:04:34,960 --> 00:04:39,560 Speaker 1: economics gets really interesting. There are several different mechanisms that 83 00:04:39,600 --> 00:04:42,560 Speaker 1: can create this. There's a bunch of useful stories. They're 84 00:04:42,640 --> 00:04:44,800 Speaker 1: very different stories, but they can each produce this same 85 00:04:44,839 --> 00:04:48,279 Speaker 1: broad pattern. The first story is that people notice bad 86 00:04:48,320 --> 00:04:50,560 Speaker 1: news faster than good news. So this is the consumer's 87 00:04:50,560 --> 00:04:56,359 Speaker 1: search story. When gas prices jump, everyone notices not so great. 88 00:04:56,600 --> 00:05:00,240 Speaker 1: I think that it's totally out of control. Is two 89 00:05:00,640 --> 00:05:04,400 Speaker 1: darn expensive? You notice? I noticed the local news notices 90 00:05:04,480 --> 00:05:08,160 Speaker 1: it's painful, it's salely. It becomes the topic of conversation 91 00:05:08,320 --> 00:05:11,560 Speaker 1: around the water cooler. But when prices drift down slowly, 92 00:05:11,600 --> 00:05:14,960 Speaker 1: different story, No siren. There's a bit of behavioral economics 93 00:05:15,040 --> 00:05:18,440 Speaker 1: going on here too. An unchanged price starts to look normal. 94 00:05:18,960 --> 00:05:20,760 Speaker 1: It just sort of sits there on the silene out 95 00:05:20,760 --> 00:05:23,240 Speaker 1: in the front of a gas station, looking familiar. Even 96 00:05:23,279 --> 00:05:25,039 Speaker 1: if the price of crude oil has fallen and that 97 00:05:25,120 --> 00:05:27,799 Speaker 1: price really ought to be lower by now, most people 98 00:05:27,800 --> 00:05:31,240 Speaker 1: don't know what the correct lower price should be this afternoon, 99 00:05:31,480 --> 00:05:33,240 Speaker 1: and a lot of drivers just keep buying from the 100 00:05:33,240 --> 00:05:36,720 Speaker 1: same station they brought from last week. That matters because 101 00:05:36,760 --> 00:05:41,080 Speaker 1: if consumers starts less aggressively. When prices are falling, then 102 00:05:41,120 --> 00:05:45,720 Speaker 1: stations can lower their prices more slowly without losing many customers. 103 00:05:46,120 --> 00:05:49,360 Speaker 1: In plain English, the stale high prices they pass as normal, 104 00:05:49,960 --> 00:05:53,000 Speaker 1: and that means that lazy buyers get soaked first few 105 00:05:53,080 --> 00:05:56,360 Speaker 1: times they buy gas on the way down. That's one mechanism. 106 00:05:56,400 --> 00:05:58,880 Speaker 1: I would you notice that's not a conspiracy theory. It's 107 00:05:58,920 --> 00:06:02,440 Speaker 1: not price gouging. Its just imperfect information, costly search, and 108 00:06:02,480 --> 00:06:04,840 Speaker 1: a little bit of human psychology. Although I also want 109 00:06:04,880 --> 00:06:06,920 Speaker 1: you to notice that it's you, the consumer, who gets 110 00:06:06,960 --> 00:06:09,719 Speaker 1: soaked as a result. Now let me turn to the 111 00:06:09,760 --> 00:06:11,880 Speaker 1: second story. It's the one that I think many people, 112 00:06:11,880 --> 00:06:16,520 Speaker 1: including the President's a spect straight away. It's called tacit collusion. 113 00:06:16,680 --> 00:06:18,760 Speaker 1: It sounds like a very dramatic term, but the basic 114 00:06:18,880 --> 00:06:21,840 Speaker 1: idea is pretty simple. Gas stations don't need to call 115 00:06:21,920 --> 00:06:24,560 Speaker 1: each other up or meeting a smoky alley in order 116 00:06:24,600 --> 00:06:29,279 Speaker 1: to agree illegally on keeping their prices high. That is illegal, 117 00:06:29,320 --> 00:06:31,520 Speaker 1: by the way. Instead, what they can do is just 118 00:06:31,560 --> 00:06:34,560 Speaker 1: watch each other. Look, my gas station can see the 119 00:06:34,680 --> 00:06:37,040 Speaker 1: sign on the gas station across the street. So when 120 00:06:37,040 --> 00:06:40,440 Speaker 1: the price of crudeles falling, both of those gas stations 121 00:06:40,480 --> 00:06:44,240 Speaker 1: face the same awkward question, should I cut the price 122 00:06:44,279 --> 00:06:46,840 Speaker 1: of gas or not? Hey, look, if I were to 123 00:06:46,880 --> 00:06:49,440 Speaker 1: cut the price of gas first the bike across the road, 124 00:06:49,480 --> 00:06:51,200 Speaker 1: he's going to see that immediately. He's going to match 125 00:06:51,240 --> 00:06:53,400 Speaker 1: me in about ten minutes. So if I cut the 126 00:06:53,400 --> 00:06:57,040 Speaker 1: price i'm charging, I'm only going to lose my profit 127 00:06:57,120 --> 00:07:00,320 Speaker 1: margin and I'm not going to win much extra business. Hey. 128 00:07:00,320 --> 00:07:02,120 Speaker 1: That's also if it's true for me, it's true for 129 00:07:02,200 --> 00:07:04,400 Speaker 1: him too. So that means I don't need to pick 130 00:07:04,440 --> 00:07:05,880 Speaker 1: up the phone and say to that blow, keep your 131 00:07:05,880 --> 00:07:08,920 Speaker 1: prices high. We both just sit there watching each other, 132 00:07:09,440 --> 00:07:12,040 Speaker 1: aware that it's not really a great idea for me 133 00:07:12,120 --> 00:07:13,840 Speaker 1: to cut my price if the other blow's going to 134 00:07:13,840 --> 00:07:16,480 Speaker 1: cut the price to match, and so that makes us 135 00:07:16,520 --> 00:07:18,880 Speaker 1: both slow to move gas prices when they're on the 136 00:07:18,880 --> 00:07:22,560 Speaker 1: way down. That's the TACIT collusion story. The tacit part 137 00:07:22,640 --> 00:07:24,480 Speaker 1: is we're not agreeing in a back alley, but it 138 00:07:24,520 --> 00:07:26,800 Speaker 1: still is collusion. The president be right to cause form 139 00:07:26,880 --> 00:07:29,880 Speaker 1: price gouging. The president if he wanted to, he could 140 00:07:29,920 --> 00:07:33,240 Speaker 1: use the safer textbook term call it tacit strategic interaction. 141 00:07:33,880 --> 00:07:36,960 Speaker 1: It's not an explicit cartel it's just firms behaving strategically 142 00:07:37,040 --> 00:07:39,800 Speaker 1: because I know they're watching me, and they know that 143 00:07:39,800 --> 00:07:43,080 Speaker 1: I'm watching them. Now here's the tricky bit. This story 144 00:07:43,240 --> 00:07:46,520 Speaker 1: is in fact plausible, but the pattern of price is 145 00:07:46,600 --> 00:07:48,760 Speaker 1: rising like a rocket and falling like a feather. That 146 00:07:48,800 --> 00:07:53,360 Speaker 1: doesn't prove it. Hey, there's a third story. Two. Some 147 00:07:53,480 --> 00:07:55,320 Speaker 1: of the lag may not be happening at the gas 148 00:07:55,320 --> 00:07:57,840 Speaker 1: station itself. It may be baked into the actual supply 149 00:07:58,000 --> 00:08:00,880 Speaker 1: chain leading up to the gas station. See the things 150 00:08:00,880 --> 00:08:03,000 Speaker 1: we're talking about the effect of arising the price of 151 00:08:03,040 --> 00:08:05,840 Speaker 1: crude oil into gasoline. But they're different things, and there's 152 00:08:05,840 --> 00:08:08,840 Speaker 1: a whole supply chain in the middle. Crude oil isn't gasoline. 153 00:08:08,840 --> 00:08:11,040 Speaker 1: It has to be refined and blended and shipped and 154 00:08:11,080 --> 00:08:14,400 Speaker 1: stored and delivered. And at each step the firms aren't 155 00:08:14,440 --> 00:08:17,880 Speaker 1: just responding to today's crude oil price. They're responding to 156 00:08:17,880 --> 00:08:19,880 Speaker 1: the cost of the inventory that they've already bought in 157 00:08:19,880 --> 00:08:23,920 Speaker 1: the cost of replacing it tomorrow. So when crude oil 158 00:08:23,920 --> 00:08:26,840 Speaker 1: prices jump, everyone in the chain knows that the next 159 00:08:26,840 --> 00:08:29,480 Speaker 1: shipment's going to be more expensive. That's a reason to 160 00:08:29,480 --> 00:08:33,040 Speaker 1: move the price up quickly. But when oil price is full, 161 00:08:33,120 --> 00:08:36,080 Speaker 1: things might move a little slower. Businesses might still be 162 00:08:36,120 --> 00:08:39,319 Speaker 1: selling gasoline that was refined from yesterday's higher cost crude, 163 00:08:39,400 --> 00:08:42,360 Speaker 1: or working through some built up inventory that they paid 164 00:08:42,400 --> 00:08:45,640 Speaker 1: more for last week. And if competition is weak at 165 00:08:45,679 --> 00:08:49,720 Speaker 1: any point along that chain refining wholesale retail, that gives 166 00:08:49,760 --> 00:08:52,280 Speaker 1: them even more room to let that decline just dribble 167 00:08:52,320 --> 00:08:56,080 Speaker 1: through to lower prices at the pump pretty slowly. Look, 168 00:08:56,120 --> 00:08:58,760 Speaker 1: it doesn't prove anyone did anything, or that anyone's innocent, 169 00:08:58,800 --> 00:09:01,400 Speaker 1: but it does mean that the symmetry that we're exploring 170 00:09:01,440 --> 00:09:04,359 Speaker 1: today can come from the structure of the market itself, 171 00:09:04,400 --> 00:09:06,839 Speaker 1: not just from what the bloke at the corner station 172 00:09:06,920 --> 00:09:10,760 Speaker 1: decides when he's changing his price. Science. So what you 173 00:09:10,840 --> 00:09:13,839 Speaker 1: need to actually do with all of this. First thing, 174 00:09:14,040 --> 00:09:16,800 Speaker 1: don't overreact to a short run in this match. If 175 00:09:16,800 --> 00:09:19,520 Speaker 1: oil fell yesterday and your local gas station hasn't moved yet, 176 00:09:19,800 --> 00:09:23,200 Speaker 1: that's not proved by itself that they're colluding to rob 177 00:09:23,240 --> 00:09:27,200 Speaker 1: your blind. The feather often does land slowly. Second, the 178 00:09:27,240 --> 00:09:32,280 Speaker 1: most useful practical lesson is about when information matters. You see, 179 00:09:32,320 --> 00:09:34,720 Speaker 1: when oil prices a rising, there's often not much you 180 00:09:34,760 --> 00:09:36,960 Speaker 1: can do. Bad news hits the market fast, by the 181 00:09:37,000 --> 00:09:39,520 Speaker 1: time you figured out that oil prices are moving, the 182 00:09:39,559 --> 00:09:42,400 Speaker 1: sign at your local gas station might have already moved. 183 00:09:43,040 --> 00:09:47,080 Speaker 1: But when oil prices are falling, well, different gas stations 184 00:09:47,080 --> 00:09:50,120 Speaker 1: don't always adjust at the same speed, and so that's 185 00:09:50,160 --> 00:09:52,400 Speaker 1: a time when it's going to be worth checking a 186 00:09:52,440 --> 00:09:55,760 Speaker 1: gas price app like gas Buddy, or glance at the 187 00:09:55,800 --> 00:09:58,280 Speaker 1: signs along your route home a little bit more carefully, 188 00:09:58,320 --> 00:10:01,040 Speaker 1: or compare a couple of the local gas stations instead 189 00:10:01,080 --> 00:10:03,880 Speaker 1: of just defaulting to the one that you always use. 190 00:10:04,800 --> 00:10:06,720 Speaker 1: You see, when the oil price falls, that's when the 191 00:10:06,760 --> 00:10:10,559 Speaker 1: information that you have is more valuable. Look, economics doesn't 192 00:10:10,559 --> 00:10:13,920 Speaker 1: always hand you a live hack, but today it does. 193 00:10:14,920 --> 00:10:17,840 Speaker 1: That live hack is search a little harder for the 194 00:10:17,880 --> 00:10:20,640 Speaker 1: gas you want to buy when oil prices are falling. 195 00:10:21,000 --> 00:10:24,000 Speaker 1: But beyond that, economics is also helpful because it'll help 196 00:10:24,040 --> 00:10:29,760 Speaker 1: you understand what you're seeing. So if prices go up 197 00:10:29,800 --> 00:10:32,760 Speaker 1: fast and come down slow, I want you to understand 198 00:10:32,760 --> 00:10:37,240 Speaker 1: that doesn't automatically mean that there's collusion among bad guys 199 00:10:37,240 --> 00:10:39,880 Speaker 1: coming out there. It could be that it could be 200 00:10:39,920 --> 00:10:43,160 Speaker 1: something else. If prices are high, gas prices are higher 201 00:10:43,280 --> 00:10:45,720 Speaker 1: even when oil prices are falling. It's true you the 202 00:10:45,760 --> 00:10:50,120 Speaker 1: consumer are getting soaked, So what's going on here? We've 203 00:10:50,200 --> 00:10:53,640 Speaker 1: learned to look at this as a market where timing, information, competition, 204 00:10:53,720 --> 00:10:56,800 Speaker 1: and the supply chain itself all matter. That is a 205 00:10:56,880 --> 00:10:59,960 Speaker 1: very economic way of thinking. You don't just ask what happened. 206 00:11:00,400 --> 00:11:03,640 Speaker 1: We're asking what mechanism could have produced it. And once 207 00:11:03,679 --> 00:11:07,160 Speaker 1: you do that, the world stops looking so random, and honestly, 208 00:11:07,200 --> 00:11:09,040 Speaker 1: sometimes it starts making sense.