Gas Pricing and Algorithms

Did you know that there are fuel companies across the industry relying on algorithms to determine what you should pay? We’ve worried about artificial intelligence replacing people. What if the bigger story is that artificial intelligence is quietly replacing competition.

Let’s follow that for a minute. Have you ever heard of company called kalibrate? It isn’t some little software company selling apps out of a garage. According to its own marketing, it’s pricing technology is used by many of America’s largest fuel retailers. It is a data, consulting, and retail analytics platforms that support location intelligence and pricing decisions for businesses globally.

When millions of Americans pull into a gas station every day, they assume that the gas station, looked at the competition across the street and decided what price would attract customers and that’s how most of us picture competition. One station charges $3.49 for a gallon and the guy across the street says I’ll make mine $3.44. Everybody wins. Isn’t that what the free market capitalism is all about? Competition right?

But, what if that’s not happening anymore? What if the owner isn’t really deciding anything? What if a computer analyzes thousands of data points and simply recommends the price that produces the highest return? In other words, what makes them the most money. Sure, a business exists to make money but isn’t this racketeering?

Multiply that not by one station, but by many thousands because we’re no longer talking about one business making one decision, we’re talking about an entire industry increasingly relying on algorithms to tell them what’s the optimal price. Notice that word again optimal. I keep coming back to it because the word matters and if I ask consumers what they want from the competition, I doubt anyone would answer: “I hope companies optimize their margins.”

Consumers want lower prices and companies want higher profits. These goals have always existed. Competition is supposed to balance the playing field. But if competitors are increasingly using similar tools, that rely on similar data, to reach similar conclusions, then competition is starting to look a lot different from that which we thought of before. 

Technology almost always moves faster than regulation. Remember when social media was just supposed to connect old classmates, old friends you haven’t seen in years? Remember when smartphones were just phones? Every  new technology arrives with the sales pitch and only later do we discover the unintended consequences, which brings me to something that almost nobody is talking about. Fuel price fixing.

These algorithms collect enormous amount amounts of data ,analyze customer behavior, watch competitors determine the price people are most likely willing to pay. It’s called optimization. There’s that word optimization. It’s a beautiful word if you’re presenting quarterly earnings. It’s not always such a beautiful word if you’re the one paying the bills.

Now, here comes my tinfoil hat moment again. So go ahead and put yours on as well. You can make fun of me. I have broad shoulders. We spent years arguing about whether artificial intelligence would replace workers. But maybe we’re looking at the wrong direction. Maybe the bigger disruption isn’t replacing workers. Maybe it’s replacing markets. Think about that. Real competition depends on uncertainty. What happens to that unpredictability when AI is left to determine what you should be paying? 

President Trump publicly criticized gasoline retailers for raising prices unto drivers when there is no physical shortage of oil, gasoline or diesel here in the United States. He’s absolutely correct. But, that’s not the whole story. If you are the driver standing at the gas pump wondering why filling your tank suddenly cost $60 plus dollars instead of $40, or the commercial truck owner-operator wondering why it cost you $600 dollars in diesel to fill your tank, you need to look at all the parties responsible.

Trump for launching the aerial campaign against Iran. Iran for intentionally attacking tankers in the Strait of Hormuz through which, 20% of the world’s oil passes, and attacking the oil infrastructure of its neighbors, the oil producing Gulf States. The Ukrainians for attacking and destroying Russian fuel refineries. The pricing algorithms in use by fuel retailers, and last but not least, the American oil companies exploiting the circumstances to make record profits on the backs of the American people