Gasoline Prices – Supply demand and competition Essay

The effects of OPEC (Organization of Petroleum Exporting Countries) are also examined by the Federal Trade Commission as well as possible nit-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 rice 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.

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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 kerosene. Kerosene 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. 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 GAP 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% impaired 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 purchasing cars which will increase the demand for oil around the world. Last year developing economies pushed the demand to 86. 7 million barrels a day and it is speculated that the demand growth will have risen to 88 million this year. The graph below reflects the average national price (red line) and he average statewide Missouri price (blue line) per gallon of gasoline, over the last two years. Over the years there have been many other contributing factors that have led to price fluctuations in crude oil and gasoline.

In 2005 Hurricanes Rata and Strain caused disruptions of major pipelines and the loss of refinery capacity. Increases in demand, higher ethanol prices, reduced refining capabilities, and the lingering effects of natural disasters will always be price determinants in this market as well. While it is unclear as to how long we will remain dependent on foreign countries or the exportation of crude oil, our country needs to find an alternative source of fuel, a way to economically extract the shale oil, or perhaps a plan to perfect the electric car.