The Issues on Rising Gas Prices - Research Paper Example

Shaderricka Huff Ogden ENC 1101 M/W 9 November Rising Gas Prices Introduction Gasoline prices have increased dramatically throughout the years in the United States. Since gas is an essential item in today’s society, I argue that gas prices should have a maximum limit. Gas prices should only be able to reach $5.00 per gallon at the highest for Regular, $5.40 for Premium, and $6.00 for Diesel. In today’s society, gas prices are too high with the status of the United States economy. Gas prices increase daily with an average of about $0.02 a day. Unfortunately, gas continues to increase more and more each day. The gas we intake into our motor vehicles is not even 100% gasoline. Within our gasoline there are contents of ethanol, therefore it is not even pure gasoline. Gasoline is refined petroleum used as fuel for internal combustion engines. Within gas there is 10% ethanol, which is defined as a systematic chemical name for ethyl alcohol. According to the Department of Energy, the United States consumes about 20 million barrels of oil products per day. Of that, almost half is used for motor gasoline. The rest is used for distillate fuel oil, jet fuel, residual fuel and other oils. Each barrel of oil contains 42 gallons (159 L), which yields 19 to 20 gallons (75 L) of gasoline. This averages to about 178 million gallons of gasoline being consumed every day in the United States. Causes of Gas Price Increases As gas price increases continue to burden the people of the country, various groups and individuals have come up with their own analyses regarding its causes. The polarization of American society in terms of politics though has greatly tainted such analyses. Apparently, the purpose is to make the gas price increase issue another weapon for advancing political causes. The lack of in-depth analysis and the tendency to immediately react to the issue without taking the necessary research has led to very superficial understanding of the origins of gas price increases. There is the belief that “the major causes of high gas prices include the increased demand for oil in places like China and India, high gasoline taxes, civil unrest in Venezuela, war in the Middle East, political instability in Nigeria, and too few refineries in the US” (Dart). A quick glance at this list of supposed causes would lead one to believe that gas price increases are largely triggered by external conditions. Dart also the points out that environmental regulations and opposition to oil exploration in certain parts of Alaska and the Gulf of Mexico are additional reasons why gas prices are increasing. Higher demand in the midst of low supply may indeed pull up the prices. However, it is also easy to recognize the fact that if Dart’s perspective of the major causes of gas price increase is to be believed, a host of other problems may also arise. It is clear that wrong analysis of problems can lead to wrong solutions, which may be more disastrous than the issue that these may be meant to resolve. Since the listed causes involved other countries, Dart’s conclusion may serve as the basis for US intervention in the affairs of other countries or in its insistence that other nations agree with its policies on oil even if these only favor American interests. On the opposite end of the excuse for US interventionism, Dart’s conclusion may also lead to an excuse for passivity and submission. Since the perceived causes are external in nature, then the US basically cannot do anything about it. Whether the path of interventionism or that of passivity is accepted, it is still the oil corporations that would benefit much. If the US does intervene in other countries, the oil corporations can take advantage of it. If it does not, there is reason for the said business giants to continue increasing their prices. Of course, if the current US federal government does not take a stand, particularly in favor of foreign interventionism, it also becomes the target of criticisms from sectors which adhere to Dart’s analysis. The truth, however, is that the real causes of gas price increases are not beyond the country’s borders but are right here inside the US. It must be reiterated that the sole responsibility of fixing the prices does not lie in the hands of any external force but in of those who control the oil industry. These are the five largest oil companies in the world, which is composed of Exxon Mobil, BP, Chevron, Royal Dutch Shell, and Conoco-Philips. Apparently, three of these giants are US-owned. In accordance to the definition of the term, these companies may well be considered already as monopolies, especially because these have established themselves in different regions in the world where they are respectively dominant. However, more often than not, these companies also agree on the average market price of crude oil, from which gas is derived from. Of course, when the prices of crude oil increase, that of gas naturally follows. Under such circumstance, any agreement reached by the five principal players in the oil industry can have very strong repercussions on the prices of oil and gas. Theoretically and in accordance with the principles of the free market system, the existence of different oil companies would have led to competition, which would then result in the tendency to lower prices. However, with only five major players, it is clear that there exists a cartel instead. This cartel of five members is the basis for gas price increases “because greater market power and more concentration (less competition) let the seller(s) have the ability to profitably maintain prices above competitive levels” (von Clough 22). The said five giant corporations virtually control the entire oil industry in US. They control 48 percent of the total production of oil in the country. Their refinery capacity composes 52 percent of that in the US. They even dominate more than half of the retail gasoline market at 63 percent. With the existence of a handful of dominant players in the oil industry that act in concert just like a cartel, it is not surprising to gas prices easily being increased without the slightest opposition from any significant force in the market. It is the existence of an oligopoly in the oil industry that is behind the unrestrained increases in the prices of gas. However, there are also two conditions that have been favorable to the dominance of the said big five companies. These two conditions may not be directly related to the operations of the oil cartel but these have, nevertheless, contributed to the strengthened control of the entire industry by the group, from the importation of crude oil, refining, and down to retail distribution. The first condition is the speculation on oil futures. Due to a liberalized economy, one that is devoid of any regulatory policy from the government, there is that notion being propagated that the principal factor dictating the rise and fall of gas prices is the market itself, which is basically an intangible or abstract force. This naturally blurs the truth that gas prices are actually determined by the big five corporations that are part of the cartel. By disregarding this fact, however, speculative investments have arisen. Traders would trade oil futures, selling or buying stocks at current prices in the hope of gaining more in the future when their value increases as anticipated. In fact, speculation can prompt the increase of prices more than the strife occurring in the oil-producing countries. An ABC news report mentioned that “the price of crude oil has gone up 38 percent in the past three months, not because of shortages, but because commodity traders have been bidding up the price in fear of what may happen in the Middle East” (Kerley). In relation to this, the findings of a report from the US congress states that “the large influx of speculative investment into oil futures has led to a situation where we have high crude oil prices despite high levels of oil in inventory” (US Senate Committee on Homeland Security and Governmental Affairs 3). While the public has to suffer the consequence of higher gas prices, which is partly caused by excessive speculation on oil futures, the big five oil corporations continue to enjoy the accumulation of larger amounts of profit. This brings the discussion to the point when government accountability is explored. Apparently, the US government has shown signs of concern over the incessant gas price increases. However, it has still not made any the significant step that would effectively put restrictions on such increases. This is because it has also subscribed to the concept that external conditions are reasons for the phenomenon. In a statement prepared for the Congress during deliberations regarding the impact of oil price increases on small businesses, Sen. John Thune pointed out that there is a need for a legislation that would reduce the country’s dependency of oil from foreign lands (US Senate Committee on Small Business and Entrepreneurship 59). Sen. Thune might have a valid point but to consider this as the principal cause instead of being peripheral is to miss the mark. By doing so, the real cause of the gas price increases is concealed, which is the existence and operation of the big five oil corporations. Whether the policymakers and the officials of the executive branch do this intentionally or not, it is clear that the oil oligopoly continues to benefit from their stance while the public suffers. Effects of Gas Price Increases The immediate effect of any increase in the prices of gas can be felt by the users themselves. Motorists who go to gas stations to have their automobiles filled would have to spend more while homeowners would have to shoulder the more costly bills for their natural gas consumption. However, while the increase does have effects on individuals, its impact on the economy is even worse and more encompassing. When gas prices go up, the costs of freight would naturally follow. This is expected because all types of transportation are dependent on gas. Of course, freight companies would not shoulder the increase themselves. If they do, they would lose a portion of their profits. What they would do instead is to increase the rate of their services. This triggers the next stage of the chain reaction. Commodities, a great majority of which are distributed by freight, would also become more expensive. Apparently, even if such products do not have any oil component in them, their prices could still go up along with the costs of fuel. This phenomenon would, of course, burden further the consumer. Aside from the increase of the rates of basic commodities, the services also would become more expensive. Restaurants would have to charge more because the materials that they use for preparing the food have also become costlier. Hospitals would have to increase their rates as medications and medical equipment become more expensive. Airline tickets would naturally cost more. However, there are studies that also show that some sectors in the economy may have benefited from the gas price increases. The public transport companies, particularly the bus lines, have enjoyed higher ridership. This is due to the fact that even car owners find it impractical to drive their own vehicles when the cost of fuel has become very expensive. However, while the ridership has increased, operating expenses have also risen (Mattson 41). As a result, while passenger volume may have grown, the actual income generated by it may not be very significant. To sum up, gas price increases trigger the rise in the rates of services and commodities. This would lead to the reduction of the purchasing power of the consumers. With less purchasing power, market demand would consequently fall, which is bad for business. Businesses, on the other hand, would have to deal with the higher cost of production because of more expensive energy while experiencing a slump in demand. Apparently, such a situation could lead to closures. Under such condition, it is also clear that the country’s gross domestic product rate would suffer. This proves correct the theory that “increases in oil prices reduce real GDP growth for several quarters” (Kliesen). By this alone, it is also already discernible that any increase in gas prices is not beneficial to the economy. However, while the economy and the average American suffer from its effect, the giant corporations would continue to rake in bigger profits. Short-term and Strategic Solutions The seriousness of the gas price increase problem has affected all sectors of society and has prompted the emergence of other more serious issues confronting the country. This problem is no longer new but concrete solutions that would generate positive results have yet to be discovered. In fact, there are still debates on how should this be addressed, which is a reflection also of the different analyses on the causes of gas price increases. There are those who insist that long-term solutions should be implemented while disregarding those that could be done immediately. On the other side of the debate are those who push for solutions that can be implemented immediately but do not really address the root causes of the problem. There individuals and groups who believe that alternative means of transportation should be employed, particularly those that do require the use of gas or other petroleum products. This belief is reinforced by the observation that people simply have the tendency to look for ways to cushion the impact of gas price increases, such as traveling by bus or by bicycle if the weather permits it (Dizon). While this may be workable solution, it can only be done for a short period of time and within a limited area of coverage. Apparently, campaigning for the implementation of such solution could not be done on a nationwide scale as this would certainly affect key industries that rely on gas for fuel. Any small town or community may successfully carry this out in its respective area but any attempt to make this more encompassing would surely meet heavy opposition from the powerful quarters that control much of the economy, particularly the sectors in energy and transportation. Another solution that is being pushed is the creation of new taxes that would lead to the generation of funds that the government can use to cushion the social impact of gas price increases. Aside from this, such taxes are expected to “help increase transport system efficiency by improving mobility options, correcting market distortions that encourage economically excessive motor vehicle travel and encouraging more accessible land use development” (Littman 21). These fees and taxes include schemes such as parking cash-out, efficient parking pricing, carbon taxes, and pay-as-you-drive pricing. However, it is obvious that such solutions do not even hit the mark. These may generate funds but at the expense of the motorists, who are ordinary income-earners, and not the giant oil firms that caused the issue. It is the lack of government intervention in a market that is dominated by the oil oligopoly that has worsened the situation. Therefore, the solution should be introduced in this particular aspect. People, who are affected by the problem ,“want to know who is reaping the rewards of rising prices, and they are looking to governments to respond to rising prices in a progressive manner—ensuring low income people and workers are not forced to carry an unfair burden, and that environmental goals are met” (Klein 1). Considering that the people are up against very powerful oil corporations. It is only just that the government act to implement restrictions; that is if it is not beholden to the said businesses. Works Cited Clough, Richard. The Truth Behind Gas Prices. Fullness Publishing, 2008. Dart, Andrew K. “The Causes and Effects of High Gas Prices.” 20 Nov. 2011 . Dizon, Alyssa. “Rising Gas Prices Likely To Fuel More Interest in Lubbock Bike, Bus Options.” Lubbock Avalanche-Journal. 23 April 2011. Kerley, David. “Higher Gas Prices Increase Costs across the Board”. ABC News. Washington 23 April 2011. Klein, Seth. Costly Energy: Why Oil and Gas Prices are Rising and What We Can Do about It: A Collection of Progressive Analysis and Policy Alternative. Ottawa: Canadian Centre for Policy Alternatives, 2001. Kliesen, Kevin L. Rising Natural Gas Prices and Real Economic Activity. Ann Arbor, MI: Inter-university Consortium for Political and Social Research, 2006. Littman, Todd. “Appropriate Response to Rising Fuel Prices Citizens Should Demand, “Raise My Prices Now!”” Victoria Transport Policy Institute. 11 April 2011. Mattson, Jeremy W. “Effects of Rising Gas Prices on Bus Ridership for Small Urban and Rural Transit Systems.” Fargo, N.D.: Upper Great Plains Transportation Institute, North Dakota State University, 2008. US Senate Committee on Homeland Security and Governmental Affairs. “The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat.” Washington DC. 19 Nov. 2011 . US Senate Committee on Small Business and Entrepreneurship. “The Impact of Rising Gas Prices on America’s Small Businesses.” Washington DC: US GPO, 2007. Read More