Cause and Effect on Gasoline Prices - Essay Example

 The price of crude oil and how its effect is felt at the pumps is an issue of interest in as far as the price of gasoline gases is concerned. Gasoline is produced from crude oil through distillation process whereby crude oil is heated and fumes captured are converted to various products including gasoline. Thus the cost of extracting crude oil as well as the cost of processing it to produce gasoline will definitely affect the price of its products. For instance, the price of crude constitutes up to half or more of the price of gasoline gallon as suggested by Gupta and Demirbas (73).

The rise in the price of crude oil has been driven by the increasing demand for oil globally and the political instability in most of the oil-producing countries according to Gallun (723). Therefore these factors end up directly affecting the price of gasoline. The depreciation of the US dollar when compared to other currencies of other countries contributes to the changes of gasoline gas price. This can be attributed to the fact that when the US dollar changes its value, there is a shift in the demand and costs of countries with different currencies.

For instance the dollars depreciation against the Euro by half, the Countries using the Euro pay half more in dollars thus increases the demand. If the Us dollar depreciates, investors in return have to shift their capital there is the rise in price of crude oil gases hence affecting price of Gasoline gas according to Obadia (23). The world wide demand and supply for crude oil affects the price of gasoline gases in different ways. This is because demand and supply of crude oil is influenced by the organization of Petroleum Exporting countries it sets price of oil products produced by its members.

This organization also holds the biggest percentage of oil supply in the world and thus it dictates the terms of supply of oil products as suggested by Boyes and Melvin (11). In terms of demand, during the summer there tends be to a lot of gasoline gas demand hence if demand exceeds supply the prices bare likely to rise. It is therefore true that imbalance in supply and demand leads to fluctuation in the price of gasoline gases according to International Monetary Fund (56). For instance if there is fast rise in demand or quick fall in supply due factors such as refinery there may occur a rapid depletion for gasoline gases.

The future of oil manufacturing and the contracts made on the future date and price for selling oil in a way affect the price of gasoline gases. On one hand with increasing technology, the future may experience increased demand for gasoline gas compared to the source of this gas and thus prices may end up increasing. On the other hand the increasing alternatives of sources of energy replacing the use of gasoline in future are likely to lead to a decrease in price of the gasoline gases. The future increase in retail gas stations which will still share the market with the existing ones will lead to lower prices in order to attract customers.

Some contracts have been established to decide on the future date and price for selling oil products. For instance a Collar contract is a mini-max strategy assuring producers of oil either a minimum or maximum range of prices for the sale of oil in the future as suggested by Gallup and Frank (221).