The Relationship Between the Retail Price of Gasoline and the World Demand for Crude Oil - Essay Example

It can found in much abundance in one place which cease to exist at some other country. This instability in the geographic distribution of crude oil makes it quite an important resource to be present in any country. The countries with its abundant deposits are on the top of the food chain economically and the countries with lesser deposits of it are quite weak economically. Hence proving the significance of crude oil for economies. Now crude oil is not only used for production of Gasoline but many other petroleum products are extracted from it.

From this we can extract that crude oil has more demand as a commodity and is not only required for the production of gasoline. Gasoline is a refined form of crude oil. Crude oil is extracted or purchased in raw form and goes through various refining processes to produce gasoline. Gasoline has become as the basic commodity which has been in use for decades now as the primary fuel for powering transportation. The transportation requirements have been increasing each year as the population of the world increases by a significant percentage each year.

Hence increasing the amount of fuel being consumed each year and the demand for gasoline. Now gasoline and crude oil have developed a relationship in which the demand for both are increasing but Gasoline is dependent on crude oil for its production hence making it the dependent product. The global demand for both gasoline and crude oil is on the rise and with no new large deposits being excavated the supply is not increasing much and the demand is growing making the prices for both oil and gasoline head upward.

The gasoline we purchase majorly includes the cost of Crude oil , the refining , marketing and distribution and the taxes. So from this we can infer that there is a inversely relationship between the supply of crude oil and the price of gasoline. Also in the years we have seen where the oil prices have dropped but gasoline prices have risen which is due to the fact that there are disruptions in the supply of oil due to unrest in the middle east. (Fuel, 2011) We also can observe this for a fact that the prices of gasoline rise accordingly with the rise of crude oil price but they don’t fall at the same rate when price of crude oil falls.

The matter behind this fact is that when prices are high , the retailer have to increase it so that they cover up for their profit margins but what makes the retailers bring price down when the price for crude oil falls is competition. In competition the retailers bring down a few cents to draw in more customers and so on the process continues until they reach a point where they reach their original profit margins or the price of crude oil again increases. Also the demand imbalance of gasoline across various seasons also has an effect on retail pricing of gasoline.

(US Energy Information Administration, 2003) 2. Explain what Marathon could do to keep the price at the pump the same without losing profits if global crude production decreased by 10%. In such a situation strategic alliances should be formed on the basis of which Marathon can make bulk purchases and at cheaper rates. If such step is not taken then Marathon will not be able to maintain a stable profit margin. By doing this Marathon will be able to purchase inventory to stock up at cheaper costs and also at the same time have enough fuel supply which would be enough to carry out operations even if there is a supply disruption of crude oil.

Marathon can employee the use of