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The price of gasoline sold at the pump is one that is not isolated from the pocketbooks of the average car owner (Niles Daily Star, 2007). Many reasons, some not connected to the actual production of gasoline, currently make up the factors that determine how much the commodity will be sold at the pump. At present, the movement of the price of gasoline is under close scrutiny by many consumer groups and motorists themselves (Andrea Pescatori and Beth Mowry, 2007).
In the past years, the household budgetary outlay for the purchase of gasoline has been a significant chunk of the household budget, averaging from 2 to 5 percent of total household expenses (Pescatori and Mowry, 2007).
The amount that an average household shells out for the consumption of gasoline tends to rise as the prices for the commodity increases, especially in times when the prices tend to “spike”, or increases suddenly (Pescatori and Mowry, 2007). This is attributed to what economic analysts call the “low price-elasticity of substitution” for the product.
(Pescatori and Mowry, 2007).
In essence, when the price of gasoline rises, these rises will impact other areas of the budget, such as the purchase and consumption of other goods and services (Pescatori and Mowry, 2007). But how are the prices of gasoline determined? Causes for price fluctuations Many Americans are still confused on the factors that determine the rise and fall of the prices of gasoline (Energy Information Administration). We must then find out what are the factors then that affect the prices of gasoline, so we might have a better view of the factors that interplay in the determination of the prices.
An elementary deduction would be to put the baseline at the cost of the main ingredient of gasoline, which is crude oil. In the current mix, crude oil costs amount to about 55 percent of the cost of gasoline (Kimberly Amadeo, 2008). The remaining 45 percent of the total costs would come from taxes and distribution costs of the product (Amadeo, 2008). It is to be understood that the tax system and distribution scales are dependable, so that the prices at the pump are actually reflective of the fluctuation of the prices of oil (Amadeo, 2008).
The crude oil used for the production of gasoline roughly averages to about 45 percent of the world’s oil production to date (Pescatori and Mowry, 2007). What remains of the production from each oil barrel is processed into diesel, kerosene, heating oil and jet fuel (Pescatori and Mowry, 2007). After oil costs, the next factor in the determination of the cost of gasoline would come from the imposition of federal, local and state taxes, the mark up of the refiners, returns of the oil of the refiners in terms of cost and profit, and as stated earlier, the distribution and marketing costs (Pescatori and Mowry, 2007).
These factors account for 9 percent of the cost of gasoline (Energy). Changes in oil prices also are prime engines of the fluctuation in gas prices (Energy). Changes in the prices of crude oil are passed on by the refiners unto the consumers in the prices of gas at the pump (Energy). Also, higher demand for gasoline in the summer is another factor in the price of gasoline (Energy). But others point to factors beyond the shores of the United States as another factor in the oil price fluctuation scenario. World oil prices are determined by the laws of supply and demand (Energy).
Most of the influence that is determining the prices of the prices in the world market is the Organization of Petroleum Exporting Countries, or OPEC (Energy). Since the groups’ inception in the 1960’s, the group has attempted to keep oil prices at their optimum levels by setting production limits among its members (Energy). The influence of the organization can be felt as most of its members have in their possession most of world’s crude oil supplies (Energy). Apart from the influence of OPEC, the rapid increases in the price of oil can be attributed to the expanding markets of the United States (Energy).
This is not only true for the United States, but also for the rest of the world (Energy). Most recently, the prices of oil in the world market have also been driven by the events unfolding in China and India (Amadeo, 2008). Both countries have been on an expansion stage lately, hence the increased demand for the commodity (Amadeo, 2008). Also, there have economic sanctions on major oil producers Iraq and Nigeria (Conoco Philips). These events, along with natural disasters such as hurricanes, like the 2005 Katrina Hurricane, and the Middle East crisis, have also played a part in the surge of the prices of oil (Conoco Philips).
For example, when the Gulf War erupted in the early 90’s, prices for oil dramatically rose (Conoco Philips). When the price of oil dropped in the Asian financial crisis in the late 90’s, the reduced economic activity was contributory to the resulting drop (Conoco Philips). This was because the crisis stymied economic activities in the region, thus the demand for oil was not that high (Conoco Philips). The chart would display the relationship of the demand and supply for the commodity was directly related to events either man-made or of natural causes (Conoco Philips).
The hurricanes that hit the United States’ Gulf Coast region caused major service and supply havoc for the country (Conoco Philips). This resulted from the closure of the major oil production facilities, platforms and refineries in the area (Conoco Philips). The disruption was felt by both onshore and offshore refining and production facilities of the United States (Conoco Philips). Also, the cost of the crude oil itself plays a major role in the price of gasoline (Energy). As seen in the diagram, incidents occurring around the globe play a part in the determination in the price of gasoline (Energy).
Current production levels place the production of gasoline at 47 barrels for every 100 barrels of crude produced (Energy). For example, the prices of oil before the turn of the millennium hovered around $ 16 a barrel (New York Times, 2008). By the turn of the year, prices for the commodity have skyrocketed to $ 200 a barrel (Times, 2008). If the supply rapidly declines or the demand for the oil increases in the same fashion, then there would be another player in the computation in the price of gasoline (Energy).
This problem may result from oil supplies being depleted as inventories are not up to the demand or imports may be lagging behind actual demand of the country, it would result in the imbalance of the demand-supply equilibrium (Energy). Why does an imbalance occur? One reason is that regions have switched fuel types (Energy). The imbalance results from the adjustment of the refiners to this new fuel (Energy). For example, gasoline may be more expensive if compared to one season than to the next (Energy). This is considered a normal fluctuation, if taking not consideration other commodities (Energy).
However, oil, is more capricious than other goods, so consumers are not afforded with choices in their purchase of gasoline (Energy). Some of the reasons for the price fluctuations is the regional locations of the supply (Energy). As the chart would show, certain regions have a higher price for gasoline than other regions (Energy). Aside from the imposition of taxes and other levies, other factors contribute to the variations in the prices of gasoline (Energy). One would be the distance of the supply from the point of distribution (Energy).
The distance of the point of distribution would have an effect on the prices of gasoline, as the places farthest from the point of production would tend to have higher prices than those that are nearer (Energy). This is born about by the costs associated with the distance as well as shipping and transportation cost attached with the supply of gasoline to the region (Energy). Supply interruptions that are planned, such as plant and pipeline maintenance operations, even done in a short period, can induce bidding for the available supplies on the market (Energy).
Again, the importance of a reliable and dependable shipping mode and facilities are paramount in the price computation (Energy). If the supplier does not have these at hand, then it would be safe to assume that the price of gasoline will remain high in the area (Energy). Another reason would be the competition present in the area between retailers (Energy). The retailers and the consumers must come to a point that the consumer is willing to pay a higher price for the gasoline sold in the area rather than travel a ways off to purchase the same at a lower price (Energy).
Another issue affecting pump prices are the alterations in the specifications in the fuel produced or sold in the United States (Conoco Philips). The introduction of new reformulated gasoline, or RFG’s, first seen in the retail markets in the areas with heavy air pollution problems in 1995, were seen as another factor in gasoline increases (Conoco Philips). The cost was reflected in the additional cost for refining this new fuel type (Conoco Philips).
The refiners attempted to recoup the added expenses in their costs by way of increased mark ups in the wholesale price for the fuel (Conoco Philips). The next part of the federally mandated introduction of the RFG program started in June 200 further adding pressure to the price scale of gasoline (Conoco Philips). These programs, designed at reduction efforts on the amounts of carbon monoxide, smog and levels of toxins in the air, included the introduction of these new reformulated gasoline types (Energy). Other environmental measures deal with the aspects of transporting and storing fuel (Energy).
For the state of California and other urban sites, the introduction of the RFG’s mean that drivers and vehicle owners in the state pay more for their gas as compared to the other regions in the United States (Energy). Currently, the state of California has implemented its own criterion for the use of the cleaner gasoline types that is more restrictive than the one in use by Federal agencies (Energy). Added to the cost of the higher fuel costs are the levying of additional state and local taxes on the sale of the gasoline above the tax levied by the Federal government (Energy).
Refinery capacity of the state must be able to run at almost break neck speeds just to meet the needs of the state’s residents (Energy). The fuel requirements of the state can be sourced from the Gulf Coast production facilities, but as earlier stated, the distance of the state will definitely be a factor in the cost of the gasoline when they reach the pump (Energy). Also, the state banned the use of methyl tertiary butyl ether, or MTBE, as an additive in the production of gasoline (Energy). It replaced it the more expensive ethanol, harnessed from corn (Energy).
Since this would drive up the prices of gasoline, it also made the necessity of having the refineries modified for the production of the new fuel (Energy). These switches have resulted in some disruptions in the supply of gasoline in the state (Energy). What would work for the stability of gas prices is actually a reduction of its use over an extended period (Amadeo, 2008). With the United States consuming about 25 percent of the world’s oil production, the proposal might work (Amadeo, 2008). Gasoline is no different from other commodities being traded (Conoco Philips).
The only viable solution to combat the rise and fall surges of gasoline is just to reduce times that people drive (Conoco Philips). With the consumption of the United States increasing, from 15 million barrels a day (bpd) to an approximated 20. 7 million bpd, a reduction of demand will convince those that drove the price of oil up in the first place, the commodities traders, to allow the price to go down to levels before this price roller coaster began (Amadeo, 2008).
References Amadeo, K. (2008). Why gas prices are so high.Retrieved October 14, 2008, from http://useconomy. about. com/od/commoditiesmarketfaq/p/high_gas_prices. htm ConocoPhilips. (n. d. ). Gasoline: events shape pump prices. Retrieved October 14, 2008, from http://www. conocophillips. com/Tech/energyanswers/energyissues/gasevents. htm Energy Information Administration. (n. d. ). A primer on gasoline prices. Retrieved October 14, 2008, from http://www. eia. doe. gov/pub/oil_gas/petroleum/analysis_publications/ primer_on_gasoline_prices/html/petbro. html Energy Information Administration.
(n. d. ). Why are gasoline prices falling so rapidly? Retrieved October 14, 2008, from http://tonto. eia. doe. gov/FTPROOT/features/falling_mogas. html Niles Daily Star. (2007, January 19). Gas price fluctuations need some managing. Niles Daily Star Editorial http://www. nilesstar. com/articles/2007/01/20/editorials/ndeditorial01. txt Pescatori, A. , Mowry, B. (2007). The pass-through of oil prices to gasoline prices. Retrieved October 14, 2008, from http://www. clevelandfed. org/research/trends/2008/0208/04ecoact. cfm
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