Exercise 1: Question 1. Everyone’s Gasoline Problem
For any consumer who owns a vehicle and has to commute daily, the rise and fall of gas prices can be difficult to comprehend. In order to understand the variances for gas and oil prices, one must evaluate the core reasons for the fluctuation. According to recent research, the quick changes in oil and gas prices can be directly associated to several factors, which include supply and demand, market speculation, taxes and the expense of refining crude oil into gasoline (Herbert, 2008). These factors affect the price of oil and gas in independent ways, but also are related. Supply and demand has a direct affect on the price of crude oil and when supply is high, usually the price of oil decreases. When supply is low, the price of oil increases. In terms of demand for example, an oil price increase is seen as reducing aggregate demand because of a reduction in spending on goods and services (Olatubi & No, 2003). In terms of supply, this increase will likely produce even more widespread effects and oil price increases will cause overall production costs to rise, shifting the aggregate supply curve to the left (Olatubi & No, 2003). According to research, growing economies globally have increased the demand for crude oil while the supply has remained fairly constant. According to the Associated Press (2013), the average price for regular unleaded gasoline, which is $3.25 per gallon, is the lowest since December 26, 2012. In September 2013, AAA Mid-Atlantic said that the average price of a gallon of regular gas in the D.C. metro area was $3.55, compared to $3.56 the prior week (AP, 2013). Market speculators play a role because oil is a product to them that can be bought and sold based on instability of prices. Speculators try to forecast world events that could impact supply and demand. They buy contracts for oil to protect themselves from sudden increases in the price of oil and when prices rise, they can then sell their contracts that were purchased at a cheaper price for a significant profit (Herbert, 2008). Taxes also effect the variances in prices around the country. Refining oil to gas and transporting it to the marketplace also has a significant impact on the price of gas. A portion of the cost of gasoline goes to turning crude oil into fuel, moving it to gas stations, and retail markup.
Another key cause to the price inflation issue is the extended period of bitterly cold weather that loomed in the northern and midwestern parts of the U.S. throughout the winter months. This led to an “increased demand in home heating oil, which is widely used in the region and is virtually identical to diesel fuel” (Lang1). This increased demand for fuel coupled with the restrictions on exported oil allowed OPEC to jack up their prices an exorbitant amount in a relatively short period of time.
Gasoline is one of the many conversation starters anywhere you go. People have different opinions on why gasoline prices are fluctuating at such a rapid pace. Some Americans have chosen a way of thinking towards the prices. Whether it be making up rumors or just plainly trash talking towards our government. You make ask yourself the same questions many economist do, why has the price of oil been dropping so fast? Why now? This a complicated question, but it boils down to the simple economics of supply and demand. Supply and demand means a relationship between how much of a particular product is available and how much of it people want, and especially the way that this affects the level of pricing. Now of course there would be a shortage of gasoline during the summer time when everyone is traveling
To understand the increase in gas prices, one must first identify the distribution of dollars paid per gallon at the pump. According to the U.S. Energy Information Administration (eia) in 2010, the annual average paid at the pump consisted of 68% crude oil, 7% refining, 10% distribution and marketing, and 15% taxes (see Fig.1). This shows an increase of crude oil over the 2000-2009 average of 51%. (e. I. Administration)
In 2004, crude oil producers around the world expected a 1.5% growth in the world’s demand for crude oil. The actual growth rate was more than double the projections at 3.3%. This growth was due to rapidly industrializing of foreign countries such as, China and India. Therefore the lack of crude oil affected the supply of gasoline to consumers at the pump.
People need oil for daily life and work. Since World War II, oil had caused many serious problems in United States and throughout the world. Remarkably, economic and social problems were heightened by the emerging energy crisis. By 1974, the United States gained a third of its oil by importing from the Middle East.[ James Oakes, et al. Of The People: A History Of The United States (Oxford University Press, 2011), 881.] When the heavy war between Israel and Arabia erupted, the United States was not able to gain enough petroleum because it supported Israel. To show the dissatisfaction with the United States’ support to Israel, Arab members of the Organization of Petroleum Exporting Countries even raised oil prices. “Overnight, OPEC raised the price of its oil from $3 to $5.11/By ”[ Merrill, Karen R.. The oil crisis of 1973-1974: a brief history with documents. Boston: Bedford/St. Martin's, 2007, 22.] Not surprisingly, the United States was strongly affected by the oil shortage and the the high price of oil. Homes and businesses could not easily solve the serious problem. Drastic protests occurred in many states such as Arkansas, New York, and Florida because a huge number of drivers could not accept the high price of gasoline.[ Merrill, Karen R.. The oil crisis of 1973-1974: a brief history with documents, 1.] Transportation was decreased in order to use less oil. Faced to the great challenge, several presidents analyzed the seriousness about the oil crisis and provided effective ways of reducing the use of oil.
According to the website of Oil-Price, today’s value for a barrel can be bought at the price of $41.25 this means that oil is not demanded as much as it used to be over the years, because of the awareness of the environment and also because it is a cyclical phenomenon, there’s no actual reason, but the price will eventually rise again. Since oil is used to produce gas, it would come with surprise if the price of gas is low since the oil cost are also low. Gas prices depend on oil costs and oil costs depend on
It is generally known that gold is widely used as an investing object storing precious value. However, gold investment dominates the risk because of several factors, and one of the most influencing factors is gold’s price fluctuation. There are three causes of the fluctuation of gold’s price, which are price mechanism, the central bank and emergency.
We the American people have seen rising oil and gasoline prices continuously over the last few decades. Each year is slightly higher than the last. However, we have seen a few instances where oil and gasoline prices have spiked rapidly enough to invoke the American public to stop spending or cut back. The first time in recent history was after the hurricanes Katrina and Rita in 2005. Then, in July 2008 we saw a massive jump to the current record high national average of $4.50 per gallon of gasoline. Oil at this time was over $115 per barrel of light sweet crude which is the oil that American’s use in their gasoline. Currently the US oil and gasoline prices continue to increase. In the last month gasoline alone has risen almost 17 cents a gallon that’s slightly over a 5% increase (source). Compare the increase in the last month to the average yearly increase of %14 or roughly 39 cents per gallon (source). This leads to a particular, why is the price of oil and gasoline increasing at such a rapid rate? Three possible reasons for this could be: the unrest in the Middle East, speculation and risky trading on futures, or a simple difference in supply and demand.
A few years ago, the price of gasoline peaked at a price of about four dollars a gallon, indicating a similarly high price for crude oil. This high price for crude oil incentivized many companies to invest in hydraulic fracturing in the state of Oklahoma. A problem arises, however, as many companies would spend more drilling than they profited from the oil drilled. According to Richard Manning, “A couple of generations ago we spent a lot less energy drilling, pumping, and distributing than we do now” (431). With this vast investment in the oil industry in Oklahoma, eventually the price of oil dropped and these companies went bankrupt. With the decline in oil prices, so too did the Oklahoman economy follow as Asjylyn Loder remarks, “In the second quarter of last year [2015], Oklahoma’s economy shrank 2.4 percent” (12). This collapse in the economy has been seen before by Oklahoma and will not likely recover for likely many
The modern world of today runs on fossil fuels with crude oil being the live blood of industrialized countries. Though much of the twentieth century old was plentiful easily acquired and low in cost it has only been in the past thirty years that we have seen oil prices rise substantially. This can be attributed to many different reason. These price changes have challenged the industrialized world to become more creative with their techniques of both acquiring oil and using it.
In 1970 oil reserves became more scarce, leading to a decrease in production, while consumption continued to grow rapidly (Wright, R. T., & Boorse, D. F. 2011). In order to fill the gap between rising demand and falling supply of oil, the United States became more and more dependent on imported oil, primarily from Arab countries in the Middle East. (Wright, R. T., & Boorse, D. F. 2011). As the U.S and many other countries became highly industrialized nations, they became even more dependent on oil imports. With demand being higher than the actual amount of supply, prices kept rising reaching a peak of $140 a barrel in 2008. (Wright, R. T., & Boorse, D. F. 2011).
Gasoline plays an incredibly monumental role toward humanity in this day and age. It is used throughout the world in many different ways, from simple tasks like transportation, to more complex tasks like goods production. The recent fluctuating gas prices have made things very difficult for many, especially when gas prices went up to highs like $5 per gallon. However, Congress has recently passed legislation on the implementation of price controls on gasoline in order to combat this growing crisis. The responsibility of allocating gas to consumers was placed into the hands of the US Department of Energy.
There are two theories as to the cause to the soaring gas prices. The newspaper articles and the press seem to be connecting the problems to the Organization of Petroleum Exporting Countries (OPEC) cutting its crude oil production by roughly 8 percent last spring. This statement is true but there is good reason behind OPEC's decision to decrease production. This reason ties into the second opinion as to the cause of rising gas prices. The thinking is the slowing in production that is directly connected to the changing industry and technological
Whether you are traveling, commuting for work, or just own a car in general, you are effected by gas prices. In the past four years gas has fluctuated tremendously, starting at $4.00 per gallon in 2014, and then declining to $1.88 per gallon in 2015. Now the gas price on average is $2.70 per gallon, but the highest gas prices in Oregon can get to be over $3.00 per gallon. How do gas prices effect the environment, your wallet, and people who work for the oil companies? I did some research to answer those exact questions.
Mast, Tom R. Over a Barrel: A Simple Guide to the Oil Shortage. Austin: Hayden, 2005. Print.