Article Analysis
ECO/365
December 13, 2012
Dariush Ershadi
Article Analysis
Gasoline prices affect nearly every aspect of the economy. The price of crude oil, the cost of processing crude into refined gasoline, and government regulation and taxes all affect the price of gas at the pump. The article “California Struggles With High Gas Prices” published in the New York Times by Clifford Krauss chronicles a high gas price spike in California due to a recent drop in gasoline supply and relates that to gas prices nationally. This paper will discuss the utility derived from the product (gasoline), why there was a change in demand and market equilibrium prices assuming supply or demand stay the same and discuss the elasticity of the product.
The article details a 20 cent hike in gas prices during the month of October 2012. Within the article there is a note that prices have gone up despite crude oil prices easing somewhat since the beginning of the year. This easing in prices has happened despite factors that typically raise prices, such as turmoil in the Middle East and sanctions in Iran. Despite these, the world economy is slowing. There appears to be a surplus as a result from countries such as Iraq, Libya, Saudi Arabia and the United States (Krauss, 2012).
The Essay on Rising Gas Prices
... consumption. Contrary to what some think, gasoline isn’t the only product refined from crude oil. In his article “Gas Prices Rising”, Matt Rosenberg wrote that, ... “Only about 51. 4% of an oil barrel is used to make gasoline; ...
This decrease in demand continues to drop the price of crude oil. With this said, gas prices have come down a total of three cents a gallon nationally (with the exception of California).
Within the state of California, the price of gasoline is typically higher than the rest of the country due to tough environmental regulations and high taxes. When Exxon Mobil’s Torrance, California refinery was shut down on October 1, there was a loss of 150,000 barrels a day within the market. This, in addition to the fire at Chevron’s 245,000-barrel-a-day facility on August 5th caused a severe shortage only within the state of California (Krauss, 2012).
Unfortunately, California is entirely dependent on fuel refined within the state due to environmental rules and as a result, there was no option to import gasoline from refineries out of state. Because gasoline is sold first to branded outlets, wholesale outlets were beginning to find themselves without stock. A limit on the supply of gasoline meant that what was left was sold to those outlets that pay a higher premium for a guaranteed supply (Krauss, 2012).
Wholesalers benefitting from the lower price were forced to shut down sending drivers to the branded outlets. With this cut in supply, the equilibrium price shot up. At the time of the article, Californians were paying an average of $4.49 a gallon for regular gasoline. This was about 70 cents above the national average (Krauss, 2012).
In my opinion, the demand for gasoline is largely inelastic. Most consumers are reliant on gasoline for transportation due to nearly all motor vehicles relying on gasoline for power. Admittedly, there is some elasticity in demand as there are hybrid vehicles available as an alternative to internal combustion vehicles. Since 2000, sales for hybrid vehicles grew from less than 10,000 to about 346,000 in 2007 (Beresteanu, 2011).
Rising cost of gasoline combined with tax incentives have begun to outweigh the excessive costs of these new vehicles. According to Kilian, there has been strong growth in international demand for crude oil between 2002 and 2008. This is countered by studies that show a relatively low increase in demand in established countries and most of the demand has come from the growth of other countries emerging in Asia. The United States showed a steady growth in demand through 1991 however this leveled off in 2004 and showed no substantial growth since then (Kilian, 2010).
The Research paper on Demand and Supply
Demand is defined as the amount of goods and services that buyers need in the market. The law of demand states that the higher the price of goods or services in the market the lower the demand when all factors are kept constant. Under natural condition, buyers will buy that product whose price will not force them to forgo another more valuable product. The interaction of price and demand is called ...
Crude Oil supply internationally changes with political climates in many differing countries and refined gasoline supply regularly changes whereas demand typically changes with the strength of the economy. Within the United States demand shifts are the result of demographic structure, degree of urbanization, and other shifts in the price of gasoline (Kilian, 2010).
It is known that crude oil production does not respond within a month to demand shocks in the crude oil market nor does it respond to the U.S. gasoline market within the same month (Kilian, 2010).
Kilian goes on to say that shocks to the supply may affect gas prices within the same month, the demand for gas and demand for crude oil do not change within the same month.
Within the article, “California Struggles With High Gas Prices” the author describes and immediate spike in gas prices within the state of California. It is a well-known fact that gasoline is used throughout many elements of the economy for transportation and gas prices effect all levels from the consumer to industry. The global economy has slowed decreasing the demand internationally and driving prices down nationally. Despite this with the loss of two large refineries in California, the price per gallon of gasoline skyrocketed in October 2012. This is largely due to a decrease in supply and a steady demand. According to Kilian, demand for gasoline is not effected by fluctuations in supply at least within a month. This supports this author’s view that a short term supply deficit will not force Californians to immediately go to a hybrid alternative with respect to their vehicles. In the long term, however, there is an increasing trend to move to hybrid vehicles or public transit to avoid higher gas prices (Beresteanu, 2011).
Reference
Beresteanu, A., & Li, S. (2011).
Gasoline Prices, Government Support, and the Demand for Hybrid Vehicles in the United States. International Economic Review, 52(1), 161-182.
Kilian, L. (2010).
Explaining Fluctuations in Gasoline Prices: A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market. Energy Journal, 31(2), 87-112.
The Essay on The price at the gas
The price at the gas pump seems outrageous as the national average price per gallon hits $3. 09, but the real tragedy of the rising prices is in the unseen affects across the spectrum of daily life. While several surveys have said people are not changing much due to the rising cost of gas, they are doing some things and the rising cost of gas has affects that people do not even realize. In some ...
Krauss, C. (October 5, 2012).
California Struggles With High Gas Prices. Retrieved from http://www.nytimes.com/2012/10/06/business/energy-environment/high-gas-prices-in-california-have-drivers-scrambling.html
