Gas Prices Pre and Post the September 11 and its Effect on the US Economy - Case Study Example

Running Head: AN EXPOSITORY ESSAY ON GAS PRICES. GAS PRICES PRE AND POST 9/11/2001 AND ITS EFFECT ON U.S. ECONOMY Name: Name of University: Subject Code: Name of Instructor: Date: Gas Prices Pre And Post 9/11/2001 and its Effect on U.S. Economy Introduction Petrol, or commonly known as gasoline in North America, is a liquid mixture that is obtained from petroleum or can be considered as one of the main products obtained from refining crude oil. Gasoline is mainly made up of aliphatic hydrocarbons and is usually improved through the addition of aromatic hydrocarbons toluene, iso-octane or even benzene to further raise its octane ratings. Primarily, gasoline is used as a fuel in internal combustion engines such as in automobiles and light trucks and accounts for almost 17 percent of United States’ energy consumption. Gasoline, or “gas” as its colloquial term, is also used to fuel recreational vehicles, boats and most of the equipments that are used in farms and in construction. Though the production of gasoline occurs year-round, there are still extra volumes of gasoline that is made to meet the gasoline requirements during the summer driving seasons. Gasoline has three main grades and these are premium, regular, and mid-grade, which is all derived from oil refineries. Several pipelines that is linked to a massive distribution chain are used to serve 168, 987 retail gasoline stations. The three main grades have different octane level, and their prices also vary according to the grade of the gasoline. Though usually, the price differential that is present between the grades is constant. Generally, gas prices have been increasing before the 9/11 incident, and it affects the economy of US and other countries either directly or indirectly through the consumers, especially their buying power. The cost that is included in the production and the transportation of gasoline from the source to the consumers is the cost of crude oil to refiners. Furthermore, the marketing and distribution costs, the refinery processing costs, and the retail station costs along with the imposed taxes of that state on gasoline, is also included in the costs of production and manufacture of gasoline. All of these costs are mainly reflected on the amount that the consumers pay in the gasoline stations. A large component that is included in the retail price of gasoline is the taxes imposed in it, either it may be Federal, State or local. The taxes account for more or less 19 percent of what the consumers pay on every gallon of gasoline. Almost 18.4 cents per gallon of gasoline is from the Federal tax and more or less 21 cents per gallon of gasoline is due to the State tax. Furthermore, the implementation of eleven States levy added State sales and other taxes and the additional local county and city taxes that is applied on gasoline, imposes a significant effect or impact on the price of gasoline. The difference in the price of gasoline that is observed from one state or town to the other is due to the varying taxes imposed and due to the varied formulations implemented in the different parts of the state, county or region (Cunningham and Burrell, 1999, p.36) Only 19 percent of the amount paid by consumers is due to refining costs and profits while only 9 percent of the retail cost paid by consumers per gallon of gasoline is due to marketing, distribution and retail dealer costs. Gasoline prices normally increase or decrease even if the price of crude oil that is used in the production of gasoline is stable, generally because of factors such as changes in crude oil prices, seasonality in the gasoline supply and demand balance, and unusual events or trends affecting the supply and demand balance. Also, local retail station competition could affect the prices of gasoline. Domestic problems that could disrupt the crude oil supply may include refinery outages and pipeline outages or demand, which includes differences in the specifications set by a particular region, area or season on the product. The effect of unusual events or trends had always influenced the price of gasoline and these includes weakening economy, increase in the production of gasoline from refineries but a decrease in the demand for gasoline for jet fuels and automobiles and the September 11, 2001 terrorist attacks. These factors account for almost, but not greater than, 30 cents per gallon of gasoline. The September 9, 2001, commonly known as 9/11, includes a series of coordinated terrorist attacks by a nineteen terrorists who were said to be affiliated with the Al-Qaeda, whose also hijacked four commercial passenger jet airlines and committed suicide attacks, crashing the each of the planes into four different targets. The World Trade Center in New York City is one of the terrorists’ targets, resulting to the collapse of the two buildings. Due to the 9/11 incident, rumors on the increase of the gasoline price had spread onto consumers like a forest fire. Panic buying had occurred, and the demand for gasoline increased. The 9/11 incident does not have any impact on the gas supply, therefore, should not have any impact on the gasoline price and their effects on the economy are not directly connected. Body Crude oil and gasoline prices constantly increases before the September 9, 2001 terrorist attacks. In January 1, 1999, the average retail regular price for crude oil and gasoline was almost 39 dollars per barrel. This price increased up to 40 dollars per barrel then decreased to 36 dollars per barrel in March 1999. But this decrease in the crude oil and gasoline price was not continuous. In May 1999, the crude oil and gasoline prices increased tremendously to 48 dollars per barrel. Since then on, the prices kept increasing and decreasing, then again increasing at a higher price (dollars per barrel) every month in the year 1999 up to July in the year 2000 almost equal to 70 dollars per barrel. By August and September 2000, the prices of crude oil and gasoline decreased greatly up to almost 59 dollars per barrel and increased slightly in October 2000 to 65 dollars per barrel. The prices of crude oil and gasoline no longer increased any higher than this, but decreased up to 58.80 dollars per barrel in January and April 2001. The prices of crude oil and gasoline started to increase rapidly by the second week of May 2001. The average retail regular price of crude oil and gasoline was at its peak in the second week of May 2001, with almost 72 dollars per barrel. The price ranged from 70 to 72 dollars per barrel from May up to the end of July 2001. Then it had rapidly decreased up to almost 57 dollars per barrel in August 2001. The decreased in the price of crude oil and gasoline was not continuous. Due to the terrorist attacks in September 11, 2001, the prices increased due to panic buying from the consumers. Rumors of tremendous increase on the crude oil and gasoline prices struck fear among the consumers. The scarcity of gasoline and crude oil supply also added to the consumers’ fear of having to avail gas at an unimaginable price. Lines to gasoline stations in the days after the September 11, 2001 terrorist attacks were really long, where customers had to wait hours just to get gasoline. The sudden increase in the demand for gasoline made gasoline stations and dealers hungry for more profit, led to an increase in the price of gasoline, higher than the price in August 2001. From almost 57 dollars per barrel in August 2001, prices increased to almost 66 dollars per barrel in the second week of September 2001. The prices of gasoline and crude oil continued to be sold at a range of 64 to 66 dollars per barrel up to October 2001 (Burdette, 2001). The prices of crude oil and gasoline because of the September 11, 2001 terrorist attacks were alarming, especially to the regulatory board on the prices of crude oil and gasoline. The government started to place penalties and fines to gasoline stations, dealers and suppliers who would impose gasoline prices that is above or higher than 2 dollars per gallon. Information dissemination was also done by the government to inform consumers of the actual price of crude oil and gasoline. The supply of crude oil and gasoline was also shown to the consumers in order to avoid further panic buying. The action of stabilizing the price of crude oil and gasoline made by the government resulted to a decrease in the gasoline price back to 58.80 dollars per barrel in October 2001. According to Michael Burdette, a consultant to the Energy Information Administration, “as of October 29, 2001, the national average retail price of regular gasoline was 1.235 dollars per gallon, its lowest level since November 8, 1999” (2001). Since September 17, the average price of gasoline had already fallen up to 29 cents in just six weeks. In Midwest, the average retail price of regular gasoline had reached a very sharp decline of 33-cents drop. This drop occurred in the national average in of 10 weeks during the Memorial Day up to the first week of August and it was only interrupted by a brief 17-cent rise in the second week of August. All in all, a decrease of almost 48 cents of the national average retail price of the gasoline was achieved from its peak in May and it is considered to be the widest one-year range in retail prices since 1990, especially considering the time frame of just five months. Economically, the sudden increase in the demand for gasoline had boosted the amount or barrels of gasoline sold in the market within a short period of time. The prices at first seemed to be a burden for consumers, but due to government regulations on the price of gasoline, the burden was lifted. The September 11, 2001 terrorist attacks had a large impact, not only in the prices of gasoline, but in the economy (especially in the world markets) as a whole. A temporary reduction or decrease in the contract with banks was done by the Federal Reserve whereas by September 11, the New York Stock Exchange, the American Stock Exchange and NASDAQ were all closed and remain as it is until September 17. When the stock market re-opened, the U.S. stocks lost $1.2 trillion in value for the week. The 9/11 incident also has extended effects to other states. Supply of gas fuels ran out in other states the next morning after the terrorist attack. In Iowa, prices was said to reach 4.65 dollars per gallon, in Michigan, it is almost over 5 dollars a gallon. A convenient store under the Casey’s Inc. in Illinois was investigated and would be penalized $50,000 if found guilty of price gouging. The company initiated customer refunds immediately. Another effect of increasing fuel prices is the reduced productivity growth in the general economy (National Research Council (U.S.), 1988, p.124) Conclusion The gasoline prices before the September 11, 2001 terrorist attacks have been observed generally to increase, with some small decrease in gasoline price on months between intervals of an increase. The gasoline price had reached its peak of 72 dollars per barrel in May 2001. The price increase at its highest has been attained even before the 9/11 incident. Before the terrorist attack, the gasoline price had already decreased largely and the price gouging and consumer panics on September 11 and the day after that had increased the gasoline price, but not to a level that is greater than the price of gasoline in May 2001. It can also be noted that after a week or month after the 9/11 incident, gasoline price reached its lowest price of 1.235 dollars per gallon, its lowest price since November 8, 1999. This is due to the strict implementation and immediate action done by the government and regulatory boards on the price of gasoline. The gasoline prices had affected consumers greatly for they are the ones who suffer any price gouging done by dealers or retailers. Economically, gasoline price, after its regulations and stabilization, had increased the buying power of the consumers specifically on gasoline since no additional or reduced prices on other commodities were reported. The huge decrease in the world markets and stocks can be greatly attributed to the 9/11 terrorist attack, but not on the gasoline price. Therefore, any increase or decrease in the price of commodities is not due to gasoline prices but due to the incident. Furthermore, the 9/11 incident should have not have any impact on the gasoline supply. References Cunningham, P. R., & Burrell, D. (1999). Liquefied Natural Gas: Developing and Financing International Energy Projects. Cambridge: Mass Kluwer Academic Publishers. National Research Council (U.S.) (1988) Electricity in Economic Growth. Washington, DC: National Academy Press. Gasoline prices skyrocket in some parts of the country. (2001). Retrieved October 15, 2007, from http://archives.cnn.com/2001/US/09/12/gas.prices/index.html Burdette, M. (2001). Why are gasoline prices falling so rapidly? Retrieved October 15, 2007, from http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2001/falling_mogas/falling_mogas.html Read More