The Price of Gasoline - Case Study Example

TOPIC OUTLINE: Gasoline crisis – what does it mean to our business world? I – Introduction: Oil is a valuable commodity upon which a lucrative industry has been built II – History of the oil industry A. Early history of the oil industry 1. Tar and kerosene made form early distillation process. 2. Industrial revolution took off fueled by coal and, later, petroleum. B. Modern history of the oil industry 1. Russia’s oil production is the largest in the 1800s. 2. U.S. overtook Russia and became the largest producer in the mid-1900s. III – The grip of oil prices in the business world A. The power of oil 1. OPEC emerging as a formidable political force 2. OPEC used oil embargo to exert pressure on the western world B. The oil glut of the 1980s C. The movement of oil prices in response to world events IV – The present day scenario and learning the lessons from history A. Economic recession and the oil crisis of 2008 B. The positive and negative impacts of the oil crisis C. On the road to recovery from the economic and oil crisis Table of Contents Executive Summary Gasoline Crisis Outlining the Major Problems Affect on Business worldwide because of the Crisis Finding a Suitable Substitute to Gasoline Conclusion References Executive Summary Gasoline crisis is not a new problem; the same problem was first experienced by the US during the II World War. The price of Gasoline is increasing everyday and it is certainly not good news for the US and for the rest of the world. We have tried relentlessly hard to conserve energy but each year we have failed to do so and the only option is to find a better substitute or to utilize the energy more efficiently and to ensure no wastage takes place whatsoever. “We think that the recent run-up in gasoline prices has significantly increased the likelihood that we will see another gas crisis in the near future. This is regardless of whether there is a true shortage, or if it’s just panic buying that takes hold. Don’t be surprised to see gasoline rationing being put in place as soon as this occurs, whether it is imposed by the retailers, or by the government. Don’t be surprised to see long lines at the pumps, a la 1972.” (The Coming Gasoline Crisis). This paper will deal with the gasoline crisis and it will compare the cost of production of Gasoline to Ethanol in order to suggest a solution to this problem. The conclusion will sum up the major points of the paper. Gasoline crisis – what does it mean to our business world? There is no question that oil, or petroleum or gasoline, is a precious commodity that built a lucrative industry. The entire trade revolving around oil – from exploration through extraction and processing to retail – is definitely one of the biggest businesses if not the biggest. Oil, as we know it, is a rather young industry. It is, however, all-encompassing. Not only do we use it for transportation but we use it to basically run the whole economy. Our present industries are fueled by oil and it is this function that saw the huge leap in the age of Industrial Revolution and had the world careening towards technological breakthroughs at unprecedented rates. History can tell us that much. To understand how oil came to dominate so much of our lives, it may be best to look as far back to history’s memory of it. The Earth processed for us the fossil fuels that we convert to oil, the result of photosynthesis of perhaps 300 to 350 million years ago, when plant and animal material were buried deep in the Earth’s crust. The petroleum industry kicked off when tar, distilled from petroleum, was used to pave the streets of Baghdad in the 8th century. Then in the 9th century, naphtha was produced from the oil field of Baku, Azerbaijan and Muhammad ibn Zakarīya Rāzi produced kerosene from distilled petroleum for use on lamps (Bilkadi, 20-27). The use of kerosene lamps became widespread and the process of distillation available throughout the world hence. But it wasn’t until the Industrial Revolution that petroleum as an industry boomed. As of 1800, the world was on the brink of industrial takeoff underscored by unprecedented technological breakthroughs that surmounted the traditional limits of human survival (Sachs, 64). This was initially fueled by coal. It wasn’t long before the industrial age’s demand for increased energy ushered new discoveries; one of the most pivotal had been the extraction of kerosene from crude oil for use as lighting and heating fuel (Halliday, 270). Since then, petroleum’s demand has only increased, escalating to the top of the list of valuable commodities. With the invention of the internal combustion engine, petroleum provided the decisive motive power of the twentieth century (Sachs, 65). In 1825, Imperial Russia began its production of oil starting with a 3,500 tons production that doubled after oil drilling took off in Azerbaijan in 1848 (Krylov, et. al., 187). The discovery that coal can be refined to kerosene in 1846 led to the setting up of small refineries near Jasło, Poland where petroleum seeps were to be found. Large refineries were soon built to accommodate the growing demand. The United States was right on its heel with oil being produced in the Drake Well near Titusville, Pennsylvania. Though its claim to being the first commercial oil well has been contested by historians and others who claim the same title, all agree on the significance of the Drake Well as the first to establish a “supply of petroleum in sufficient quantity to support business enterprises of magnitude” (Owen, 12). Russia was not far behind, establishing its first major oil refinery in 1861 in Baku, by then producing 90% of the world’s supply of oil. Oil trade rapidly progressed soon thereafter. It gained a new breakthrough, when the first oil tanker was launched into the Caspian Sea in 1878 (Akiner, 5). Russia maintained its place at the lead up until the turn of the 20th century, producing half of the world’s oil supply. They transported oil from the Caspian to Batumi in the Black Sea and from Chechnya to the Caspian through kilometer-long pipelines. With the proliferation of technologies employed, oil fields were soon established in several countries from 1920 onwards. About this time, the United States’ production overtook Russia’s to claim for itself the title of world’s largest oil producer. Comparison between the cost of production of Ethanol and Gasoline- A Substitute (Price of Ethanol vs. Gasoline, data 360.org) It can be clearly made out from the price chart that the price of gasoline is much higher when compared to Ethanol and this automatically goes to that the cost of production of gasoline is much cheaper when compared to Ethanol. The graph also goes to show the fluctuating price of Ethanol, the price almost touch 6$ on the other hand there is not much fluctuation in the case of Ethanol. “Either way, gasoline is far more efficient. Groppe estimates that it produces 94 percent more energy than it takes to make it. Ethanols pump prices are misleading, too, he argues, because the government subsidizes the cost by 51 cents a gallon. Ethanol is quite a good substitute and the use of the same will also bring this crisis to an end. Another breakthrough at the half of the century was the building of the first offshore oil platform in the Gulf Coast of Louisiana. Throughout history, access and control to abundant natural resources has been the driving force behind powerful nation’s colonization and empire-building – from the Roman centurions to the Spanish conquistadors and Great Britain’s monarchs. Since oil became a much-valued article of trade, modern imperialism took on a new form – and a new target – during this time of globalization. In fact, since World War I, oil factored into warfare, diplomacy, and international politics; in particular, control of oil reserves have become the overarching goal of the world’s superpowers meddling in the politics of oil-producing regions. The power that oil supply affords the nations who have it, and have it in abundance, has been evident throughout history as well. Of these, the most pronounced, and most daring perhaps, was the 1978 oil embargo, when the Organization of Petroleum Exporting Countries (OPEC), a group of oil-producing nations, flexed its muscles at the Western world for failing to accommodate their conditions; it was also the time the world realized what a formidable political force OPEC, with its oil, has become. OPEC acts in truth as a cartel; presently, it consists of 12 member countries (Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela) although membership has been inconstant since its conception in 1960. Venezuela – who by then has become a top exporter of oil – initiated the creation of the group and sought the alliance of other oil-exporting countries. This was so as to protect their oil’s profitability when then U.S. President Dwight Eisenhower pass into law the setting up of quotas on Venezuelan oil to favor Canadian and Mexican supply which, in effect, drove down the prices of oil in the region. OPEC, thus, was born to ensure the stability of prices and eliminate fluctuations; its principal goals, however, was to safeguard the interest of the group as a whole and the individual member countries. In turn, they wielded such influence that culminated in the 1973 oil embargos. The 1973 oil embargo was triggered by the Arab-Israeli conflict. The Arab member countries of OPEC exerted pressure on the West to stop aid going into Israel. When the Western world did not heed the call, and even allowed Israel to hold out during the attacks of Egyptian and Syrian forces through provisions of supplies to Israel, OPEC retaliated by imposing the oil embargos which lasted from October 17, 1973 to March 18, 1974. The world could do nothing but watch in alarm as prices of oil doubled, tripled, and quadrupled driving inflations sky-high along with it. The might of OPEC has since diminished but presently, they still control the largest share of the pie: OPEC nations account for two-thirds of the world’s oil reserves and they have 35.6% share of the world’s oil production as of last year. The Organization for Economic Cooperation and Development or OECD – an organization of developed countries with high-income economies – controls 23.8% of the world’s oil production, the second-largest next to OPEC, while the post-Soviet states wield control over the third largest portion accounting for 14.8% (BP Global, 2006). OPEC also started losing its might along with its unity, triggered as well by the conflicts that came one after another – the Persian Gulf War and Iraq’s attack on Kuwait. The surges in prices during these times have also become the trend in subsequent security attacks and wars involving the U.S. – the most powerful country today – in particular. It has even been speculated that the military conflicts themselves were in part a wrestle for control over access to the world’s remaining oil reserves. This is not an entirely shocking notion. After all, oil consumption is steadily growing but the supply is finite and may soon be depleted. This is the essence of the Hubbert peak theory, otherwise known as peak oil, which led superpowers and emerging superpowers to scramble for a more sustainable energy source while securing their future supply. Nevertheless, the world could not forget the implications of the 1973 oil embargo. The following years did nothing to diminish the memory, particularly since oil supply and oil prices have constantly been on the limelight, with the media following every volatile move. The world was still reeling from the effects of the 1973 crisis and OPEC was still trying to stabilize prices by coming to an agreement on how much price increase should be imposed in the later part of 1970s when the oil glut hit the world in the advent of the 1980s. The oil glut of the 1980s – due to over production coming in during a time of reduced demand – was especially memorable because of the six-year decline in the price of oil, slashed to a more than 50% average price drop in 1986 (Williams, 2007). The early 1980s also marked a time of division within OPEC, when Saudis flood the market with inexpensive oil forcing price cuts and Iran launched heavy offensive against Iraq. OPEC seemed to have lost control over the price of oil which continued to dip as demand fell, with people conserving due to the recession, exacerbated by the heightening Persian Gulf War (Williams, 2007). It wasn’t until 1987 that crude oil prices began to move up again and this was due to the imminent Gulf Cooperation Council meeting supposedly for OPEC to reach a possible production accord which they did in November of 1987. Between the late 1980s and up until September 2003, crude oil on the New York Mercantile Index (NYMEX) was on the average at $25/barrel. It rose and fell with during this period, though in response to world events that have affected the oil trade directly and indirectly. The Iraq vs. Iran War and Iraq’s invasion of Kuwait jeopardized supply in the region thereby causing the prices to jump up. The 9/11 attacks on the U.S. in 2001, the subsequent U.S. attack and occupation of Afghanistan, and the U.S. invasion on Iraq in 2003 also pushed prices up, even higher that the targets set by OPEC. But it wasn’t until late 2003 that prices began to steadily increase. From $30/bbl in 2003, oil price doubled to $60/bbl in 2005, increasing further to $100 in 2007, reaching an all-time high of $143.30 in July of 2008 (www.futures.tradingcharts.com). Then the credit crunch took hold and the economy plunged just as people were also cutting back on expenses as the world face the threat of an oil crisis. Global recession coupled with the decline in petroleum resources and tension in the Middle East brought oil prices way down, falling below $40/bbl at the close of 2008. There is a lesson to be had in history, especially in the seesawing price of oil. Tensions and conflicts jack up the price of oil, in anticipation of shortages in supplies reminiscent of the oil embargo of the past. Consumers react by conserving, with the transport sector, incidentally the biggest consumer of oil, taking the heaviest losses as people cut back on their gasoline. The tensions themselves have been thought to have a root in oil imperialism – superpowers wanting to brandish greater access and control on resources – particularly now that the world seems to be racing to new era where oil may soon be obsolete, although not until it is depleted. As well as that, oil means incalculable wealth – something that history also taught us. The Baku oil boom was instrumental in the rapid industrialization of what was then undeveloped Russia. The major industries built around oil in the U.S. in the earlier part of the 20th century helped the country to rise to its superpower status. The glittering wealth of Saudi Arabia is also because of its oil reserves. Venezuela, too, is another one example that merits a mention: a country that went from rags to riches because of its oil supply, and hounded by the U.S. because of it (Perkins, 231-238). Oil pricing is volatile, and each rise and dive translates to a consequent push and pull of various sectors of the economy. Recently, we are witness to how petroleum prices skyrocketed that had the nations slashing their consumption and putting in emergency measures to mitigate the dire economic repercussions. The concerted effort and the global financial meltdown saw an equally desperate dive in the price of oil. In a matter of months, oil went from an all-time high to an all-time low. Mere speculations can spike prices easily. Now, the world is seeing an apparent struggle to stabilize the price of oil as governments all over the world attempt to gain better control of the economy. Clearly, we are in the middle of a gasoline crisis as serious as the economic crisis we haven’t recovered from. Governments are steering their countries’ economy to calmer waters with bailouts and stimulus packages and it may soon bring the world out of the worst of it. But for oil, it may be a little different. Control of oil is outside of the respective government’s hands; as it is, oil is dictated by a relative few and more than the world’s economy recovering, the countries who basically control oil trade would want their oil’s profitability protected. A classic example is how OPEC wants to impose a quota on oil production to raise prices and thereby increase their revenues. Yes, there is an oil crisis, or at least there has been and we are slowly recovering from it. As a consumer, I have personally faced that and there’s no other way to put it. But history, as presented here, shows us that however oil-producing countries attempt to control the price of oil to ratchet up their revenues, consumers pull the prices back down through conservation. This is how supply and demand balances the economy, in laymen’s view. In that, the oil crisis spins off positive impacts that, as we shall soon see, even out the negative effects of the crisis. For one, people and industries learn to cut back, a habit that will soon be hard to break. Since we have been choking the air with pollution coming from the exhausts of our cars and factories, cutting back on gas consumption is an act that benefits the environment. Moreover, the oil crisis and the threat of diminishing supply give us the initiative to start looking for alternative and, more importantly, sustainable and renewable, means of energy, something that environmental advocates have been pushing for in order to curb the devastating effects of the imminent climate change. It is no surprise that despite the relatively recent history of modern petroleum, it has been fraught with power struggle between superpower countries for the control of oil. This control of oil, which oil-producing countries fought as hard not to relinquish, has a hand in dictating which way the economy runs, if indirectly at times. Oil pricing may be volatile, and the rest of the business world rides on its shoulders, but market forces has always pulled back the runaway prices into a manageable level, so long as consumers do their part in keeping the producers in check. Conclusion The paper has focused on Ethanol as a potential substitute of Gasoline to show that it is much easier and better to use Ethanol instead of using Gasoline. The price comparison also goes to show that the price of Gasoline is much higher than the price of Ethanol. The paper presented a comprehensive analysis of how the price of corn affected and all the other factors indicate that we must start using Ethanol and slowly start decreasing the use of Gasoline in order to solve this present Gasoline crisis. This will bring a lot of stability in the price of Gasoline and when the use of Gasoline is decreased, the price will also become less and much more stable than ever before. This is a very good solution to solve the present Gasoline crisis that the world is witnessing. WORKS CITED Akiner, Shirin. The Caspian: Politics, Energy and Security. UK: Routledge, 2004. Bilkadi, Zayn . "The Oil Weapons." Saudi Aramco World January-February 1995: 20-27. BP Global. 2006. “British Petroleum table of world oil production”. 20 March 2009 Futures.TradingCharts.com. 2008. Light Crude Oil EmiNY (QM, NYMEX). 20 March 2009 Halliday, Fred. The Middle East in International Relations: Power and Ideology. New York: Cambridge UP, 2005. Krylov,N.Y., A.A. Bokserman, E.R.Stavrovsky. The Oil Industry of the Former Soviet Union. Australia: Gordon and Breach Science Publishers, 1998. Owen, Edgar Wesley Owen. Trek of the Oil Finders. Tulsa, Okla.: American Association of Petroleum Geologists, 1975. Organization of Petroleum Exporting Countries. 20 March 2009 Price of Ethanol vs. Gasoline. In data 360.org. Retrieved on 28 March 2009 from: Perkins, John. Confessions of an Economic Hitman. USA: Penguin Press, 2004. Sachs, Jeffrey. Common Wealth: Economics for a crowed planet. New York: Penguin Press, 2008. The Coming Gasoline Crisis. In Routing By Rumor. Retrieved on 30 April 2009 from: http://routingbyrumor.wordpress.com/2008/05/04/the-coming-gasoline-shortage-get-ready-for-gas-lines-and-rationing/ Williams, James. 2007. “Oil Price History and Analysis”. WTRG Economics. 20 March 2009 Read More