EIB B284. Assignment B. Minseok Lee
Q1>
Member of Parliament,
While your concern for the gasoline price and related issue of foreign oil
companies’ profiteering is understandable given that there might have been not enough
information available for you to examine, it is important to see both the big picture and
the details entailed in the matter.
Crude oil producers, refiners, retailers, and consumers take its own part in the
eventual setting of gasoline prices. As you see in the diagram below, dynamics within
and among these parties differ significantly from one period to another. In addition,
international oil companies compete intensively with one another. Even in the upstream
business that my firm has been focusing on, we really cannot afford to profiteer. The
number of entities that are currently in this business is enough for the market to conduct
the self-correction needed for the efficient end. I believe that most entities, including my
company, are well aware of the importance of focusing on the continuously profitable
business model rather than becoming a onetime earner. The main focus of my company’s
business is on developing better technologies and better risk management, along with
securing a constructive relationship with governments around the world.
We do not violate the principles stated above because we know that to do so is
destructive both for the governments and the company in the long run. Please consider
the points that have been made in this letter.
Sincerely,
Minseok Lee
Diagram: UK gasoline price structure
<Assumptions>
. UK gasoline price is shaped in the way described by the diagram.
. Zevon Co. does not have significant refining or retailing business in the UK.
EIB B284. Assignment B. Minseok Lee
Q2>
Minister,
What you have in mind might be seen as a good solution for the domestic
problem; however, it might not be a realistic approach to the problems as the price freeze
is likely to cause domestic market distortion eventually and, possibly, a serious
international dispute. An oil price freeze in Greece will motivate the locals to hold as
much oil as possible and speculate until the price freeze ends. This is likely to result in
gasoline price overshooting followed by period of extremely high volatility in the local
oil market.
It is evident that the international community does not favor Greece halting its
international oil trade; this is already troublesome. (Halting international oil trade from
and into Greece is a required if the retail price freeze were to be done. Freezing retail
price without such a measure will simply result in the supply of cheap oil to overseas
consumers at the expense of the local oil retailers.) However, the situation is in no way
improved even if we suppose the case where the import and export of oil unapproved by
Greek government is forbidden. As long as the retail price freeze is in place, international
oil companies and refiners will have little reason to do business in Greece. When energy
providers retreat, it is not difficult to see how inefficient the energy market will get within
a year. Local consumers will have difficulties looking for easy access to energy. This will
work against the well being of the country. Domestic oil prices will face serious pressure
for a sharp hike, and as history tells, market’s call for and against asset bubble and
discount is something extremely difficult not to obey even for an agency as powerful as a
government. This is likely to damage the Greek economy.
We respect your effort and creativity used in the process; however, we strongly
recommend you to reconsider your plan, based on the reasons we have explained above.
Sincerely,
Minseok Lee
EIB B284. Assignment B. Minseok Lee
Q3>
Head of the CSSRAR,
The falling marketing margin may be attributed to the character of the retail
business: easy entry. If “a 5-year moratorium would be imposed on new service station
construction,” it will grow a bubble in retail business and eventually make it burst. This
will hurt the industry and create undesired negative spike in the industry. In addition, the
meaning of “detailed justification of the need for a new service station” is vague. Should
the analysis be inaccurately conducted, such a tool will work against the market’s needs.
This is especially true when the station that was supposed to do badly manages to
continue its operation only thanks to the 5-year moratorium. Also, requiring new stations
to acquire government license after 5 years will do little to make the market more
efficient. We all know how much bureaucracy and legal requirements can be nonconducive to a desired business environment. To whom the license will be granted is
another sensitive question.
Any change to the law must entail a long-term view of the industry and be
sufficiently mindful of the prosperity of the society as a whole. We do not see this
suggestion to be so, and thus we do not feel comfortable with supporting this law.
We do hope that the retail business will turn profitable soon, but painful loss
might not be avoidable if it is the market’s call. I am sure you also understand how strong
and persistent market forces are, and we hope that you successfully manage to adapt to
the changing business environment with alternative innovations.
Sincerely,
Minseok Lee
EIB B284. Assignment B. Minseok Lee
Q4>
Congressman Ed Markey,
While higher prices in poorer neighborhoods may be seen unfair, it is not
reasonable to suggest that relatively poor neighborhoods have a natural right to pay the
same or less of what relatively rich neighborhoods pay for oil. In fact, there are a number
of factors that must be taken into account before discussing the gasoline price level of
these two regions. (Given that the US is a market economy, I expect that gas stations
cannot afford to jack up the price of their gasoline if there are local competitors with
much lower gasoline prices. Hence, it is safe to use the term ‘gasoline price level.’ This
implies that a higher gasoline price in Medford than that in Lincoln is the norm for other
gasoline station operators, as well.)
In fact, there are many reasons why the gasoline prices in Lincoln are lower than
those of Medford’s. Our branded stations at Medford show higher maintenance costs
thanks to tighter security, more frequent customer visits, and more frequent facility
check-ups that are necessary for customers’ safety and to prevent machines’ malfunction.
These additional costs are inevitable, as the sizes of cars in Medford are generally smaller
than those in Lincoln and crime rates are higher. In addition to this, Lincoln has a better
emergency fire extinguishing system than Medford does, due to greater financial
contribution by the locals to the public services. Due to this factor, our branded stations
are equipped with better fire extinguishing systems in the Medford stations than in
Lincoln.
Also, Lincoln’s upper class residents have been extra sensitive to changes in gas
prices. Our understanding behind this phenomenon is that many Lincoln residents travel
significant distances to and from work and pass by more gas stations. As a result, when
the price of gas in Lincoln is slightly higher than that in other regions, the sales volume in
Lincoln stations drops significantly. On the other hand, there is a significant proportion of
Medford residents who make their earnings in local economy; hence, the corresponding
drop is not as great.
We respect your dedication and concern about the local community; however, we
strongly urge additional research on the matter.
Sincerely,
Minseok Lee