Gas prices and the limitations of “free markets”

This thing about gas prices in northwestern Vermont just keeps getting more and more interesting.

Earlier this week, Senator Bernie Sanders called for a federal investigation into why gas prices are higher in the northwest, while they’ve dropped in other parts of the state. (Including very nearby parts.) He offered a hint to the feds: the fact that gas station ownership is heavily concentrated in the Northwest. Nearly 60% of the gas stations in Chittenden County are owned by four companies.

(One of them,. R.L. Vallee, is owned by Skip Vallee, a very generous donor to Republican campaigns. For his fundraising work in 2004, he was named Ambassador to Slovakia by President Bush. Earlier, he’d made one spectacularly unsuccessful foray into politics, spending a massive $134,000 on a losing bid for State Senate.

If anyone out there has information about the political affiliations of the other three, I’d be happy to hear it. The other three outfits are Champlain Oil owned by the Cairns family; Simon’s, owned by Joe and Charles Handy; and S.B. Collins, owned by Bruce Jolley.)

In today’s Freeploid (available here if you haven’t used up your monthly allotment of ten freebie articles), there’s a really good story about the issue. And the Big Four had some fascinating (in a stupid and/or condescending way) things to say about gas prices. I’ll present a selection here, and follow with some information on why free markets don’t work in sectors like this.

First new bit: Bernie reports that Burlington-area gas prices are out of whack with a Federal Trade Commission computer model. According to said model, the price of a gallon of gas should have been somewhere between $3.25 and $3.58 — not the actual $3.68 average.

The Big Four gas station operators were quick to take umbrage at Bernie’s call.  

“It’s normal competition,” said Bruce Jolley of S.B. Collins Inc. of St. Albans. “You watch what everybody else is doing.”

Interesting way of putting it, Bruce. That could mean you’re making sure your prices are the lowest around, or it could mean you’re not lowering your prices unless you have to. Jolley continues…

Asked why Burlington-area prices earlier this week were 35 cents a gallon higher than in Middlebury, Jolley said Middlebury had “different competitive pressures.”

Yeah, Middlebury is more isolated and has a lot fewer drivers. You’d think those factors would raise prices, not lower them. After all, it’s harder to get the gas there, and you’re selling in substantially smaller quantities. Whatever happened to economies of scale? But wait, Jolley has one more insight to offer:

Asked why Burlington’s prices were the among the highest in New England, he said, “I don’t have an answer for that.”

Well, thanks a lot. You’ve been in the gas station business since the mid-1970s, and you don’t know how gas prices come about?

Skip Vallee offered the biggest howler of all. After the jump…

Vallee said Sanders should support the Keystone pipeline project and the plan to refine tar sands oil from Canada for use as gasoline and other petroleum products if he is truly interested in saving his constituents money at the gas pump.

“That would save Vermonters 30 cents a gallon,” Vallee said.

Sure thing, Skippy. The Keystone pipeline would funnel tar sands oil from Canada to refineries and ports on the Gulf of Mexico for export overseas. It would have no direct effect on Vermont gas prices, and would not lower US prices at all unless the Canadian oil is so abundant that it floods the global market, lowering oil prices for everyone. And that’s

As it happens, I recently read a very good explanation for the gas price phenomenon. It comes from a study of electricity markets done by Sarosh Talukdar of Carnegie Mellon University, as reported in David Cay Johnston’s excellent book “Free Lunch.”

Talukdar created an ideal market for electricity. It had a decent number of producers and utilities, competing on an equal footing. You’d expect that competitive pressures would force electricity prices to fall to the lowest level that would allow producers a reasonable profit.  

But they didn’t. Prices rose. Talukdar ran the model four times, adjusting the parameters, and each time the result was the same.

If this had happened in real life, you’d be crying “collusion” and “price fixing.” But these weren’t real companies, it was just a computer simulation. The conclusion, as reported by Johnston:

What the experiments showed was that sellers could jack up prices in this market because the buyers are forced to buy. If the price of a share of stock or a piece of land is too high, buyers can walk away. Not so electricity.  …So long as no one broke ranks and undercut the market, the sellers overall get higher prices and fatter profits…

…This unstated coordination gave the producers of electricity what economists call market power, which means the ability to set prices higher than a competitive market would allow.

…”Collusion is a crime,” Talukdar noted, “but learning is not. My studies show it is easy to learn from the signals given by others how to get the benefits of colluding without breaking the law.”

The markets for electricity and gas are very similar in one crucial way: captive customers. If you’re driving around Burlington and your gauge is on “E”, you’re not driving to Middlebury for a fill up. Hell, if your tank is 1/4 full, you’re not driving to Middlebury just to save 25 cents a gallon. The Burlington area is. practically speaking, a captive market.

Remember, this works even if there is no active collusion — just a handful of experienced operators who, as Talukdar puts it, know how to read the signals.  

Conservatives these days are fond of putting their faith in free markets. But that’s not enough. Winding up the free market and letting it go simply doesn’t work for a variety of products and services, including the most essential ones. Talukdar concludes that “the design of markets matters a great deal and the design must be verified to see if it really works as a free market.”

That notorious communist Adam Smith had some things to say about this, too. He was the foremost apostle of free markets — but he included some very strong caveats. He warned that a free market wouldn’t work unless buyers and sellers were equally knowledgeable about the transaction, equally free to engage in commerce or not, and had free choice of equivalent options. The second qualifier doesn’t apply to Chittenden County gas prices: sellers are free to sell, but buyers are stuck with the choices available in their geographic area. In that circumstance, as Talukdar proved, prices are likely to be higher than they should.  

14 thoughts on “Gas prices and the limitations of “free markets”

  1. and thanks to Bernie for calling the question

    isn’t it interesting how we have become accustomed to these high prices; talk about a giant sucking sound, at least 80% of the cost of a gallon leaves the state

    as we listen to the endless complaints about the “burden” of Vermont taxes, we rarely (if ever) hear about the enormous drain on households & businesses from transportation & heating fuels; it is the equivalent of a tax

    how can it possibly be in the public interest to export so much money for basic needs?  

  2. Was it not rumored someplace that GasolineValley as Freyne called him, basically colluded with some other Colchester folks to basically bury the Colchester COSTCO’s plan to introduce lower cost fuel to the area???   Rumored further that SKIP actually was so bold as to tell the COSTCO folks that he would not deliver to them-he being BOTH the wholesaler and the retailer (two bites at the profit apple) but Costco has their own source in Jersey so they told him to pound sand.   Then he and others apparently threw a wrench into the zoning process which has delayed the project but not apparently completely stalled it.  More time for Skip to take a few more pennies out of our pockets and buy pretty flowers for the Maplefields crappers.  

    Skip is also the guy who called our friend Jim Jeffords a Benedict Arnold on national TV….when he bolted from the party due to the education issue.  

  3. Middlebury’s pricing advantage may be just one more example of how wealthier people (in this case, communities) enjoy advantages over poorer people when it comes to the so-called “free marketplace.”

    The poor are more likely to put up with price exploitation than are the rich because they simply haven’t the luxury of time and focus to expend on smaller battles when they are just trying to pull in a living wage.  This has been played out innumerable times in poor urban neighborhoods in New York and Chicago, where retailers charge exorbitant prices for a single cucumber or tomato, while their suburban counterpart charges virtually the same amount for half-a-dozen.

    The “free market” becomes the “captive market” when you are too poor to drive far enough to choose a bargain over a swindle.

    No doubt Jolley has figured out long ago that you don’t put one over on the nobs of Middlebury.

  4. The cost of price shopping for gas is too high, because you have to drive your car to do it!  At IRS reimbursement rates of $.55 per mile, to get a 5 cent per gallon savings, you would use it all up driving just one mile (assuming an 11 gallon fill up to make the math easier).  Going 70 miles round trip to Middlebury would cost nearly $40, $21 for the gas alone.  Gas would have to be $1.60 per gallon for that to make sense.

  5. I didn’t include it in my diary because Vallee was only one of many players, but yes, about four years ago he tried to block a Costco in Colchester on (get ready to laugh) environmental grounds.

    It was reported in the Freeps at the time, but their archive sucks. I found this reference to the story at, of all places, Vermont Tiger.

  6. Middlebury is a nice college town but is nneat he bastion of wealth you make it out to be.  The 2 stations that compete most on price are the closest to the campus, which would indicate to me that they’re focused on student drivers and college staff…hardly the “rich”.  Norwich, for example, is a much more expensive place to live, and certainly has no gasoline bargains.

    The place where “you have to have money to make money” is on fuel pre buys. Average people can’t spring $2000 up front to save $500. The top 10% can.

  7. Didn’t I say that? In so many words, at least:

    The markets for electricity and gas are very similar in one crucial way: captive customers. If you’re driving around Burlington and your gauge is on “E”, you’re not driving to Middlebury for a fill up. Hell, if your tank is 1/4 full, you’re not driving to Middlebury just to save 25 cents a gallon. The Burlington area is. practically speaking, a captive market.

  8. there is an app for that….   and it works pretty well.  just make sure the cheap station is on your way.   it would be nice to be able to stockpile 200 gallons at a wholesale rate at home, like heating oil, but with the ETOH in the stuff, it would be part water before you got to use it.    

  9. I just pointed out that there are far more low income Vermonters living in Burlington than in Middlebury.  

    If I am mistaken about that ratio, I would happily concede the point.

  10. My post should have stopped with the observation that it’s not even worth traveling a mile for 5 cents a gallon.

  11. Another way to look at it is that if you have 1 gallon of gas left in a car that gets 25 MPG and has a 15 gallon tank (and you paid $3.60/gal for the gas locally) then you would spend 14.4 cents per mile traveled (not the fed reimbursement rate for mileage). Using that math, if you had a 25 mile round trip to fill up at a station that had a price of $3.40 per gallon, you would spend $3.60 getting there and back, but you would save only $3 (assuming you squeeze 15 gallons in there).  

  12. BERNIE’s VILLAIN DU JOUR !    (published on-line July 12. 2012) by Brooke Paige

    Does anyone check into these things before they start tapping out their opinions on the key pad then publishing it on their “blog”, sending it to press or airing it live! Certainly, the minions in the Sander’s camp – who put words in “Bernie’s” mouth DO NOT! A thirty minute examination of the issue (on the internet) and a few phone calls would have revealed ALL of the following!

    1 – That the finished gasoline that is delivered from Rutland follows an entirely different production and delivery path than the gasoline delivered from Burlington/St. Albans.

    RUTLAND fuels are produced on the East Coast in Northern New Jersey, Philadelphia and Delaware and are transported by rail to Albany and trucked to Rutland – primarily distributed by Midway to Central & Southern Vermont with some distribution over the mountains to the Connecticut Valley (VT & NH). This product is primarily produced using less expensive WTI (West Texas Intermediate – light, sweet-low sulphur) crude.

    BURLINGTON (and ST. ALBANS) fuels are produced primarily in Montreal at the Suncor Refinery. All of this fuel is refined from Brent (North Sea – light sweet) crude, the most expensive oil in the world market. This crude is transported by tankers to the PMTL (Portland-Montreal Pipeline)off loaded in Portland, ME and sent by pipeline to Montreal for refining at Suncor. Champlain Oil Co. (COCO), Burlington; S. B. Collins, St. Albans and R.L. Vallee, St. Albans all purchase their fuels from this Montreal source.

    The differential in the price of the unrefined Brent Crude is 10 – 25 dollars/barrel (42/gal/bbl) therefore the cost before refining is 24 – 60 cents/per/gallon. Starting to see why Burlington Gas cost more! Brent Crude is extracted from the North Sea Oil Fields of the shores of Scotland, England, Finland, Denmark and Germany. Its high quality and close proximity to European Markets permits the producers obtain a premium price in the world marketplace.

    2 – MIDDLEBURY is serviced by suppliers in Rutland, Burlington and St. Albans. In this market the Rutland supplier has a significant cost advantage and the Burlington/St. Albans suppliers are forced to heavily discount their sales in order to compete for sales.

    3 – Each of the fuel distributors own and operate Convenience Store (c-stores) in their primary markets: COCO operates the Champlain Farms Stores, S. B. Collins – Jolley Stores, R. L. Vallee – Maplefields, Midway – Exxon/Mobil Mini-Marts (many in combination with Dunkin Donuts in-store franchises). Not mentioned in this discussion is Cumberland Farms which wholly owns Gulf Oil.

    4 – Unfairly included in Mr. Sander’s attack was Simon’s Markets owned by Handy Enterprises. Handy DOES NOT distribute fuel – in fact they are customers of several of the regional suppliers. Paul Handy’s story is truly a wonderful rags-to-riches tale. Arriving in Vermont in 1954 from Lebanon (via Montreal), Paul began by working in a local gas station as a mechanic – soon he purchased his first station. Over the years Paul and his brother, Salamin, built an empire that includes over a dozen Simon’s Markets, Champlain Beverages (a soda distributor), The Shelburne Travelodge and the Countryside Motel. The brothers helped their relatives emigrate to Vermont – sharing with them the wonderful opportunity that hard work and dedication had brought them. The Handvs do not even belong in this equation – they compete effectively in the Burlington – Montpelier markets despite their purchasing disadvantage. Paul died in 2005 and his tradition of success is carried on by his sons Joseph and Peter, as well as nephews including Charlie – who spoke with this author about Mr. Sander’s attack. Charlie told me that he and his cousins have lots to tell Mr. Sanders about the additional difficulties that he has brought to the family business by his actions and inactions – including his current foolishness. HEY BERNIE! – pick up the phone and give the Handys a call, if you dare! The Handy family has lots they would like to say to you.

    5 – The c-store business counts on gas sales to bring in customers hoping that they will decide to come into the store and make an additional purchase. Gas is a lost leader (or at best a break even sale) and these operators count on the additional patronage to make their operations profitable. These retailers work diligently to maintain the lowest (profitable) prices – the c-store side of their operations depends upon a constant flow of satisfied repeat customers. If gasoline sales were as profitable as “Bernie” would have us believe, do you think these folks would endure the headaches of running mini-markets and most often fast food operation – PLEASE!

    6 – The Head of the Bureau of Economics at the FTC (Federal Trade Commission), Louis Silva, explained (in a telephone conversation, Tuesday) that the FTC report that Sanders cited is designed to compare the market prices in different markets – not to explain variations within markets (i.e. New England vs Gulf Coast – the benchmark). The Weekly Report does not and cannot be used to compare local pricing within a market because of refining, distribution and marketing conditions unique to those areas (like Vermont).

    The Weekly Report was set up in the wake of Katrina to monitor the Gulf Coast markets (to check for gouging in the wake of the Hurricane). When it was found to be a useful tool for the FTC, the decision was made to make the report permanent. (Details in the September 2011 report “Gas Pricing and Petroleum Industry Update”)  

    7 – The Deportment of Energy routinely monitor and analyze Market and Wholesale Pricing conditions. These market conditions are fully explained in “DOE Motor Fuels – Understanding the Factors Influencing Retail Pricing of Gasoline (GAO-05-525SP-2005)”. The report details each of the factors that influence the pricing of gasoline. In brief the wholesale price, at the time the report was written, was a combination of: Crude Oil 48% + Taxes 23% + Refining 17% + Distribution and Marketing 12% = 100% to which the retailer added a mark-up of 4 – 15 cents/gallon. A 2011 update sets the percentages in the era of $4/gal. gasoline at: Crude Oil 65%, Refining 14%, Taxes 13% (fixed in most states to a per gallon rate) and Distribution and Marketing 8% = 100% – the retailer market-up remaining 4 – 15 cents/gal. – a substantial percentage decrease when you consider that the sale price has doubled.

    8 – As if this was not enough to convince you that despite “Bernie'” ranting, these folks are probably not making a fair profit (let alone “cheating the consumer!”). Selling Gasoline is an expensive and highly regulated business – the initial cost of setting up the tanks and pumps + required (and necessary) fire protection equipment is generally $500,000 to $1,000,000 (or more) depending on the number of pumps and tanks, regular testing of the tanks (for leakage) cost over $1,000 twice a year, service calls start at $1,000 + time and materials, when the equipment fails. Additionally, the inspectors from Vermont Weights and Measures and Vermont Environmental Protection routinely visit and inspect each pump and tank at every location. Still looking like EASY MONEY?  

    I could continue however only a little child (or a Vermont U.S. Senator) could still think that differences of 5, 10 or 15 cents/gallon translate into consumer fraud, collusion among competitors or illegal activity!

    All of these folks are hard working Vermonters carrying on family traditions that stretch back generations. So why has “Bernie” target these folks (families) to be his Villains du jour. Did I neglect that these folks are also rock-ribbed Republicans – safe and easy targets for  the “independent” (Democrat in disguise) Sanders. YES – Tony Cairns (COCO), Bruce Jolley (S. B. Collins), Skip Vallee and the Handys are Republicans all – God love them! In fact, Skip was Bush’s choice as Ambassador to Slovakia and the Handys are personal friends of Governor Douglas!

    Now, not that anyone will be expecting it; HOW ABOUT AN APOLOGY BERNIE for trampling and defaming the reputations of these respected, hard working Vermonters!

    H. Brooke Paige

    Washington, Vermont


    H. Brooke Paige

    P.O. Box #41

    Washington, Vermont 05675

    (H) 1-802-883-2320

    (C) 1-802-224-6076

    e-mail at:


    To those that have only a passing experience with investigative reporting THIS is how you develop a accurate and credible story! You need to make the calls, do the research and keep you personal bias and predispositions at home!

  13. The author of the piece ,H. Brooke Paige is apparently running against Rep. John MacGovern of Windsor in the Republican US Senate Primary to challenge Senator Sanders this fall.


Leave a Reply

Your email address will not be published. Required fields are marked *