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Gas Prices


Gas Prices Essay, Research Paper

How does that happen? I stopped in the morning on the way in to work and filled up my gas tank for $1.15/gallon or roughly $13 a tank and then just ten hours later, the same gas station, the same grade of gas is $1.10/gallon! If I had only waited, I could have saved enough money to buy a candy bar or a can of pop for my much-needed afternoon sugar break! But, of course, it has worked the other way in the past. There have been plenty of times when I have waited until the afternoon to stop and the price suddenly goes up. I just can?t win! I even started keeping a diary of my fill-ups when I bought my new car last May. I track the price per gallon, total amount spent, and the miles traveled on that tank. I was more interested in my miles per gallon, but I have noticed that in one three month time span, gas prices have ranged from $.88 to $1.22 per gallon at the same station. I?ve always known that the price of gasoline depended on various factors, but have never spent much time pondering why. I know that competition with other gas stations in the area has something to do with it as well as the price of the materials, labor costs, environmental concerns, and the on-going battle with Saddam Hussein and the Middle East. But what is the ONE reason gas prices change so much in such little time?

OPEC, an intergovernmental organization dedicated to the stability and prosperity of the petroleum industry, supply more than 40 percent of the worlds oil, and as an organization, is instrumental in determining gas prices. After its formation in 1960 with five member countries: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, six other countries joined to form today?s total of eleven. Those countries and the dates they joined are: Quatar (1961), Indonesia (1962), SP Libyan AV (1962), United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). OPEC?s mission is to ensure the stabilization of oil prices in international oil markets with a view to eliminate harmful and unnecessary fluctuations. OPEC is also concerned with the interest of producing nations and maintaining their steady income; efficient, economic and regular supply of petroleum to consuming nations; and a fair return of capital to the petroleum industry investors.

Even though OPEC plays an important role in the petroleum industry, it does not control the oil market. As stated previously, the eleven member countries produce about 40 percent of the world?s crude oil. OPEC?s oil exports account for 60 percent of oil traded internationally, and therefore can have a strong influence on the oil market, especially if it decides to reduce or increase its level of productions. The world has seen this happen in the past, such as during the Gulf Crisis in 1990, when three million barrels of oil per day were suddenly removed from the market. OPEC seeks prosperity in the petroleum market by voluntarily producing more or less oil as needed.

Obviously, oil is important and is currently the most important source of energy. Although forecasters predict that oil?s share of the worldwide energy market will fall slightly due to other forms of energy (gas, coal, hydronuclear), oil will still dominate with 37 percent of the market. However, oil is running out. At the current rate of production, the oil reserves are sufficient to last another 80 years.

So, exactly how much oil does the world use if the supply will run out possibly in our lifetime? As of 1996, there were 1,047,200 million barrels of proven crude oil reserves. Sound like a lot? Consider this: the total world consumption of crude oil on a single day in 1996 averaged 71.7 million barrels per day. OPEC estimates that number will rise to 100 million barrels per day by the year 2020. Saudi Arabia has 261,444 million barrels on reserve and produce 8.1 million barrels per day, making it the top country for both reserves and production. The fact that Saudi Arabia produces 10% of the worlds oil supply is enough for anyone to understand why we felt the hurt of the Gulf Crisis. During that time oil prices soared out of control as a result of Saudi Arabia becoming temporary isolated from the rest of the world.

Most of the statistics available are worldwide, and when one considers the U.S. statistics alone, a more precise picture of the U.S. dependence on oil, or in other words, gasoline, is portrayed. Half of the oil used in the U.S. is imported, the highest amount in our history. 65% to 75% of that comes from the Middle East, and 95% of the energy used for transportation in the U.S. comes from oil, which in turn drives the market. Transportation accounts for two-thirds of total U.S. petroleum use and nearly all of the gasoline and distillate fuel. OPEC does meet twice a year to coordinate their oil production policies with the predicted amount of demand. Oil price shocks and price manipulation by the OPEC cartel from 1979 to 1991 cost the U.S. economy about $4 trillion, almost as much as we spent on national defense in the same time period and more than the interest payments on the national debt. Each major price shock was followed by an economic recession in the United States. With the growth of U.S. imports and increasing dependence, future price shocks are predicted, and seemly, unavoidable.

Obviously, consumers need steady supplies of oil, and the producers depend on that demand. It is a never-ending cycle of supply and demand. Oil producers depend on the consumer, and if they receive less income from the consumer they have less ability to spend money and import goods from the consumer. Potential investors in the petroleum industry also get concerned about the lowering of demand. If they refuse to invest, we may face a shortage of oil supply in the years to come and a downward spiral in the global economy. However, if oil producers continue to receive reasonable prices from the consumer, then the cycle will continue as intended.

Due to the petroleum industry imminent despise, it is crucial that other sources of energy begin to be utilized. It is not uncommon to see specials on television, or inserts in magazines, profiling cars that run on electric, batteries and solar power. Not only are these options needed for their alternative power options, but also for the environment. The U.S. government states that over 100 million Americans live in areas that failed at least one National Ambient Air Quality Standard. When a new car is produced, it must meet federal emissions standards. But as vehicles get older, the amount of pollution they produce increases. Hence, the invention of the zero emissions automobile. Also, vehicles with better fuel economy have been proven to produce less pollution over time. Many automobile manufactures take this into consideration when marketing their new vehicles that may get 30 miles per gallon verses 20. Many consumers are swayed by the fact that purchasing a certain vehicle may be helping the environment, not just saving on gas money.

But what does OPEC, oil production levels in the Middle East, the U.S. dependence on gasoline, environmental concerns and new technology have to do with the price of a gallon of gas at my local gas station? And which factor is the determining one? As I found out early in my research, it is not just ONE thing, it is a specific, and often varying combination.

The most basic concept is that gasoline prices are directly reflected by the price of the crude oil, the main ingredient. The price of crude oil in influenced by the decisions made by the producers, particularly which prices they are willing to sell and the quantities they are willing and able to supply. Low prices of crude oil can be caused by a number of factors. Generally, it is an imbalance of supply and demand. If oil production rises faster than demand, then prices can fall and all of the oil producers will suffer. Consumers can also suffer if the oil industry is unprofitable and discourages investors. High prices of crude oil are usually due to a shortage of oil supplies. Crude oil prices react to the balance of supply and demand in the short term, and the rate of investment in the long term. If investment is not made far enough in advance, oil supplies could be limited in the long term, thus raising prices.

But, perhaps, the one reason that gas prices rise and fall has nothing to do with competition, the price of crude oil, or a war in the Middle East. Gasoline, the finished product that consumers purchase, if affected heavily by taxation. In some countries, consumers pay five times the amount that was paid for the original crude oil. Taxes account for 70 percent or more of the final price of oil products in some countries. This enables the oil consuming countries to receive as much, if not more income than the oil producing countries. In 1996, the oil taxes in the US, Canada, Japan, Germany, Italy, Britain, and France accounted for $270 billion dollars. Consumers may barely notice even a major change in the price of crude oil.

Even though consumers may not like the constant change in gasoline prices at the pump, it is important that they are closely regulated. If gasoline is too expensive, than goods and services requiring that form of energy become more expensive, and the economy experiences inflation. Alternative forms of energy would also become more cost-competitive, but the oil producers would eventually increase their supplies and prices would go back down. If gasoline is inexpensive, consumers would tend to waste this limited natural resource. If prices are too low, supplies would eventually fall until there was a price shock, leading back to inflation. Like it or not, the cheap gas in the morning may be the most expensive on the block by the time rush hour is over.


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