Gasoline Prices - Supply demand and competition

Topics: Petroleum, Oil shale, Saudi Arabia Pages: 6 (944 words) Published: April 26, 2014

Gasoline Prices - The Supply, Demand and Competition

Gasoline Prices - The Supply, Demand and Competition
Each time I fill up my car at the gas pump I often wonder why gas prices fluctuate the way they do. What factors really contribute to this growing consumer issue? The price of crude oil is by far the main determinant in gasoline prices. Other contributing factors include the speed in which retail gas prices adjust to changes in crude oil and wholesale gas prices, refinery profit margins and the possible influence of commodities speculation. The effects of OPEC (Organization of Petroleum Exporting Countries) are also examined by the Federal Trade Commission as well as possible anti-trust violations and market manipulation by refineries. OPEC, which is a cartel that tries to restrict oil output, is an intergovernmental organization of twelve developing countries which include Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. It has often been said that if OPEC were run by companies instead of countries, it would be a criminal conspiracy.

Crude Oil is the main component in gasoline production. In 2007, the oil cartel made bad business decisions which drove the price of a crude oil up and to a record price of $147 per barrel. In 2008 this hit our economy hard and threw us into a recession. Currently, a barrel of crude oil is around $90 per barrel and is exported to the U.S. from the Middle East and North Africa. The U.S. does have has massive oil reserves buried beneath parts of Colorado, Utah and Wyoming. The federal government, scientists and geologists have known about these reserves for nearly a century. These reserves are estimated at around 2 trillion barrels. This oil, which is called “oil shale” or “shale oil”, remains untapped because it is located at depths far below the Rocky Mountains. Scientists and petroleum companies believe that it would be extremely costly to extricate this oil and with our current technology, nearly impossible. If we could extract even half of the oil, it would be nearly triple the oil reserves of Saudi Arabia. There has been a lot of controversy surrounding the shale oil deposits in western United States mostly because it’s not really oil but an oil-like substance called kerogen. Kerogen can be turned into lower grade oil that can be used in cars however it would be a very expensive, painstaking process. So, what does it cost to produce a gallon of gasoline? Gasoline prices are affected by the costs of refining, distribution, marketing and government taxes. Crude oil is 68% or two-thirds of the pump price. Taxes add an average 49.5 cents per gallon to the price. Of that, 18.4 cents goes to the federal government and the rest goes to state and local governments. Tax rates vary so this is one reason gasoline prices differ state to state. Additional costs of producing gasoline include: refining the crude oil, storage, delivery and retailing. The map below reflects the allocation percentage each state pays in taxes per gallon of gasoline.

How does today’s market compare to that in 1949? The average price of a gallon of gasoline was 27 cents in 1949 compared to $4.00 per gallon in 2007. If you look at relative costs of the unskilled worker in both periods, you will find that the worker in 2007 spent two-thirds as much as the worker in 1949. Much of this can be attributed to wages increasing at a faster rate than gasoline prices. If you look at it from a GDP perspective, a gallon of gasoline was a four and a half times larger share of output in 1949 than it was in 2007. The taxes, on the other hand, are much higher now at 20% compared to 1.5%. It is expected that crude oil will again increase to over $100 per barrel and prices at the pump to increase to around $5.00 per gallon in 2012. This comes from speculation as more and more people in the fast-growing economies of China and India are...

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