StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Supply and Demand of Gasoline - Essay Example

Cite this document
Summary
This paper discusses the condition of supply and demand of gasoline in the world market and how the interaction between these fundamental economic principles affects the price level for this petroleum product. Moreover, this paper zooms in on how the impact of Hurricane Katrina brought about the dramatic increase in gasoline prices…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER95.7% of users find it useful
Supply and Demand of Gasoline
Read Text Preview

Extract of sample "Supply and Demand of Gasoline"

SUPPLY AND DEMAND Supply and Demand of Gasoline SCHOOL Supply and Demand of Gasoline Gasoline is one of the main sources of energy which fuels internal combustion engines. This energy resource is vital for the global economy as it fuels the various sectors of the industry by making possible the transportation of goods and services as well as providing heat. In this regard, companies and even individuals are largely dependent gasoline to address their myriad needs. This paper discusses the condition of supply and demand of gasoline in the world market and how the interaction between these fundamental economic principles affects the price level for this petroleum product. Moreover, this paper zooms in on how the impact of Hurricane Katrina brought about the dramatic increase in gasoline prices. It also highlights some points on how gasoline price increases can be hampered or moderated. Gasoline Supply The gasoline price has ostensibly undergone extensive fluctuations mainly because of the product nature and the industry which supplies the world with oil. Note that a bulk of the aggregate oil output is produced by the Organization of Petroleum Exporting Countries (OPEC). This influential group is organized as a cartel and composed of nations in the Middle East including United Arab Emirates, Saudi Arabia and Kuwait among others. The main produce of these countries is oil and other petroleum products. Other countries, including the United States, are largely dependent on these countries for their oil supply (Case & Fair, 2002). With their rich oil resources, these nations created the cartel which has the ability to control member countries’ oil production capacity and output quotas of enabled them to collude to raise the oil price by. (“The Columbia Electronic Encyclopedia,” 2003) Given its mandate, supply of oil including gasoline is significantly affected by political unrest arising between these oil-exporting countries and other countries as well. To illustrate this point, supply of petroleum products was adversely affected by the war between Iran and Iraq in 1979. This tumultuous battle between two of the largest oil producers had caused a global oil supply shock and resulted in a dramatic increase in the price of oil. The limited oil supply then was further aggravated by the restricted means of transporting oil products to the rest of the world (“Wikipedia,” n.d.). Similarly, Iraq’s invasion of Kuwait that spawned the Gulf War also caused a leftward shift in the supply curve (Case & Fair, 2002) during early 1990’s. Aside from wars, OPEC also has the power to impose sanctions by restricting supply of oil product to other countries in light of political reasons. For instance, the cartel initiated an embargo on export oil and cut down supply as an indication their protest for western nations’ support of Israel. This caused a sharp leftward shift in oil supply curve and ultimately resulted in the severe escalation in the price of oil in 1973. (“Wikipedia,” n.d.) In terms of domestic supply, the United States recently encountered supply shortages brought about by Hurricane Katrina. It is reported that the calamity has adversely impacted the supply chain from the off-shore rigs in the Gulf Coast, which is the largest source of oil for the domestic market. The short-term shutdowns due to power outages during the peak of the hurricane affected two major on-shore pipelines. Furthermore, it was reported that at least 10% of the country’s refining capacity was not operational in the wake of the storm. (“Wikipedia,” n.d.) Apart from these, Louisiana, the epicenter of the hurricane and heavily devastated, also houses one of the main ports that serves as one of the most important inlets for oil imports (“Wikipedia,” n.d.). This means that supply is not only affected by the factors affecting actual production but also by the transportation of oil products. It is evident that Hurricane Katrina has disrupted the country’s ability to produce and at the same time deliver oil products like gasoline (“Wikipedia,” n.d.). The effect of the storm and the resulting reduction in oil supply on the price of oil products specifically gasoline is illustrated in Table 1 (Effect of Hurricane Katrina on Domestic Gasoline Price) below. Table 1 – Effect of Hurricane Katrina on Domestic Gasoline Price Since both the production and delivery of gasoline has been affected by the storm, the supply curve S1 shifted leftward to S2. Assuming the same level of demand, quantity supplied decreases while price of gasoline increases. This is exhibited during the first week of September 2005 as average retail price of gasoline reached the all-time high of $3.04 per gallon. This figure is comparable to the supply shock experienced in 1981 when gasoline price shot up to $3.03 per gallon (adjusted for inflation). (“Wikipedia,” n.d.) Gasoline Demand On the aspect of demand, oil or gasoline consumption substantially depends on the global economic condition. In this regard, there were notable cutbacks in oil demand during periods of economic downturns. For instance, the Asian crisis in 1997 and the 9/11 attacks in 2001 resulted in economic weakness which drove down the price of oil or gasoline. In times of dismal slumps, oversupply of oil and its related products arises due to weak demand, thus, putting a downward pressure on the price of oil or gasoline. On the other hand, an active economy has increasing demand for oil or gasoline resulting in the uptick in oil or gasoline prices. As an example, the United States has one of the biggest demands for petroleum products and accounts for almost one quarter of aggregate demand for oil (“Wikipedia,” n.d.). As the country is in the economic recovery stage, its energy requirement is apparently growing. To address the country would demand more oil or gasoline to fuel its commercial and industrial sectors. In the context of Hurricane Katrina, increase in the demand for oil causing a supply shortage in some states is attributed to panic buying. People bought more oil than usual in anticipation of a supply shortage. As a result, the meteoric rise in the price of oil and gasoline was experienced. Price System and Ways to Reduce Gasoline Price When the quantity demanded exceeds quantity supplied, as in the case of the United States when Hurricane Katrina devastated some states and crippled oil production and delivery, the prevailing market system or price system resulted in price rationing. As the supply becomes limited, oil supply was rationed to those who are willing to pay for higher prices. (Case & Fair, 2002) To manage oil supply and demand, the government has resorted to imposing alternative rationing system to distribute the available gasoline supply as experienced in 1974 (Case & Fair, 2002). Aside from this, it may also opt to undertake other measures to ensure efficiency in the oil market and regulate the price increases in oil products. As there is a general trend of upward movement in the price of oil and other oil products stimulated by more conducive investment scenarios, the government should be able to anticipate the upcoming price increases and bring forth solutions to ensure sufficient supply. Better yet, both the public and private sectors should endeavor to make industries less dependent on oil, gasoline and fossil fuels given that these non-renewable resources are gradually being depleted. Reducing the dependency of economies on oil and oil products would make them less vulnerable to supply and price fluctuations. Moreover, decrease in demand would cause a leftward shift in the demand curve (Case & Fair, 2002) and bring down price of oil or gasoline. Some companies have already recognized and invested on research of the potential of alternative resources such as fuel cell technology, hydrogen fuel, methanol, biofuels, solar energy, tidal energy and wind energy among others (“Wikipedia,” n.d.). References Case, K. & Fair, R. (2002). Principles of Economics, 7th ed. Prentice Hall Business Publishing. The Columbia Electronic Encyclopedia, 6th ed. (2003). Columbia University Press. Retrieved 22 November 2005, from http://www.answers.com. Wikipedia. (n.d.). Retrieved 22 November 2005, from http://en.wikipedia.org. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Supply and Demand of Gasoline Essay Example | Topics and Well Written Essays - 1250 words”, n.d.)
Retrieved from https://studentshare.org/macro-microeconomics/1535410-supply-and-demand-of-gasoline
(Supply and Demand of Gasoline Essay Example | Topics and Well Written Essays - 1250 Words)
https://studentshare.org/macro-microeconomics/1535410-supply-and-demand-of-gasoline.
“Supply and Demand of Gasoline Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.org/macro-microeconomics/1535410-supply-and-demand-of-gasoline.
  • Cited: 0 times

CHECK THESE SAMPLES OF Supply and Demand of Gasoline

Demand and Supply Analysis

demand and Supply Analysis Date 1.... 1: demand and Supply curves 3.... a) demand and supply are equal at the points when equilibrium quantity is Q=200 units.... This shown by the negative gradient depicted by the demand function of -2, it means that for every 1 unit increase in price quantity demanded reduces by 2 units.... c) The slope of the demand function is -2; this means that an increase in price by 1 unit solicits a reduction in quantity demanded by 2 units....
5 Pages (1250 words) Essay

Macroeconomics: Product Possibilities and Opportunity Cost

The shift in demand indicated in the given demand curve may have resulted from a systematic increase in price of the commodity that made consumers to anticipate for future increase in prices leading to an increase in demand.... In the given market supplier increased prices of their commodities to compensate for the opportunities they will lose due to expected low demand.... None of the indicated scenario would lead to an increase in demand....
3 Pages (750 words) Essay

Oil Embargo: Its Effects on the Price, Supply and Demand of Oil in the US

Economies in industrialized countries in the world were greatly affected. Oil Embargo: Its Effects on the Price, supply and demand of Oil in the US In October 16, 1973, the Organization of Petroleum Exporting Countries (OPEC) led by Saudi Arabia cut production and placed an embargo on shipments of crude oil to Western countries particularly the US and the Netherlands and a total boycott in Israel.... uring the past 25 years, the nominal price of gasoline for the United States has risen at an average annual rate of 5....
2 Pages (500 words) Essay

Economics Supply and Demand of Gasoline

This research discusses the condition of Supply and Demand of Gasoline in the world market, how the interaction between these economic principles affects the price level for gasoline and how the impact of Hurricane Katrina brought about the dramatic increase in gasoline prices....  … This research will begin with the statement that gasoline is one of the main sources of energy which fuels internal combustion engines.... nbsp; The paper tells that the gasoline price has ostensibly undergone extensive fluctuations mainly because of the product nature and the industry which supplies the world with oil....
5 Pages (1250 words) Essay

Gasoline Demand and Supply

This essay "Gasoline Demand and Supply" examines the demand for and the supply of gasoline in the market are determined by some special factors.... For example, demand is governed by the price of gasoline, the availability of substitutes, the price of those substitutes, geographical proximity to the place where substitutes are available.... Also, there can be seen some small number of gasoline suppliers in the market.... hellip; In an oligopoly market, it has a high degree of market concentration and it indicates that a larger portion of the oligopoly market is owned by the leading gasoline firms of the particular country....
8 Pages (2000 words) Essay

Potential reasons for the increase of gas prices

It is not believed by everyone, but it is a fact that the total quantity of crude oil is not utilized for the production of gasoline.... Therefore, increase in the demand of oil in a stabilized and economical country can affect the price of gasoline in other countries of the world.... Thus, fluctuation of oil demand and supply is another potential factor that results in the higher prices of gasoline and other oil products in different regions of the planet....
6 Pages (1500 words) Essay

Impact of Rise in Price of Gasoline

The author of this paper claims that Oil acts as an input to the refinery of gasoline.... Hence rise in the price of oil is likely to cause the supply of gasoline to fall.... nbsp;The supply curve of gasoline will shift to left.... hellip; Y-axis shows the price of gasoline and x-axis shows the demand and supply of gasoline.... Due to the increase in the price of gasoline the supply curve S1 shifts leftward....
2 Pages (500 words) Research Paper

The Myth of Increasing Gasoline Supply

Thus, if one examines the rules of supply and demand, an increasing demand and a finite supply will always eventually lead to price increases – a temporary increase in supply may alleviate prices to a small degree, but even this may be minimal because speculators will always be able to buy high and sell higher, as the world supply is still known to be finite.... One of the most dangerous of these is the idea that increased production will decrease the cost of gasoline, and that drilling should be increased in places such as Alaska....
1 Pages (250 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us