Gas Prices Fluctuations - Essay Example

GAS PRICES No - Today's Order 117991 America's lifeline is gasoline. It is observed that vehicles for personal use alone consume 65 gallons of gasoline and diesel fuel annually. This number is believed to enhance by 2.6 percent every year. The galloping prices of gas are down one month and shoot up next before escalating to over 30 percent. This fact is evident in Price hike which is observed between the years 2004-05. (How Gas Prices Work) It is to be stressed that the industrialized world survives basically on gasoline which is the blood line fluid in determining the economy of a country. The consumption of gasoline by the United States alone for a year is around 130 billion gallons which is almost 500 billion liters. (How Gasoline Works) The economy of the United States has witnessed four major shocks in connection with the oil price which occurred during 1973-74, 1979-80, 1990-91, NS 1999-2000 with a time span of 25 years. There was a unanimous view among the analysts that holding of energy independently would be the pivotal factor for designing a relevant National energy policy. If higher energy efficiency is mastered the aftermath of the oil price shock on the economy can be controlled. This effect has been proved for the year 1999-2000 where the oil price shock had a negligible effect on the economy when compared to the recent past. The candidates for the presidential campaign brought to light the necessity for greater American energy independence and expressed the idea of less dependence on oil import. Even though the United States has a hold to effect the gas price, it is to be understood that the market is not national but international. The American energy policy proves to be relatively undeterred force of supply and demand which allowed constituting the prices for various energy sources. The public consumption of the energy source is also effected through this policy. The prices that are thought to be particularly sticky are wage contracts, publication subscriptions and items from catalogues. (Labonte; Makinen, 2000) The totally market based national energy policy argues that the market prices may blend all the relevant costs to the individual it may exempt the cause that are relevant to the nation. It is important to note that the prices may fall short to bring in a premium that would counteract any unwarranted foreign influence on the foreign and domestic policies of the United States. In the end, since the oil supply shocks are fickle and less anticipated market prices can soar high when they occur. So when this jerk disrupts, as in the past, it will have a considerable effect on Gross Domestic Product -- GDP, employment and inflation. Oil being an inevitable ingredient in the production and transit of most goods, naturally an oil price hike will affect the cost of production for the producers. This effect will also be shunned by products which use supplementary energy sources since those prices would have also experienced a hike. Thus the supply shock decreases an economic output and increases the price level in a short run. If there is flexibility in the prices then the producers could reduce input prices such as wages excluding the total output and total price level. Only then, there would be no decline in output or hike in the price level. But when sticky prices persist then producers have no other alternative than to lower the rest of the input prices quickly which would result on a price hike that would affect the consumers. The consequence would be the rate of output is lowered as people decide to buy fewer goods, the prices being higher. Price of labor would be compensated with some employers signed off. So with fewer workers, only a lesser output is produced, so a rise in the price of oil and the inefficacy of other prices to accommodate temporarily results in the reduction of the rate of growth of output that is produced by an economy. (Labonte; Makinen, 2000) Since it is inevitable for the producers to dump part of the price hike on the consumers by increasing the price of the goods, there is an adhoc in the general price level. Economists argue about an adjustment of the prices in the long run stating that the reduction in output will come to an end: that is the supply shock is incapable of creating a long run change in the economy's total productive capacity which is merely a re-distribution of resources that make oil producers healthier and the opposite for the consumers. But it is to be noted that until there is an effective adjustment of the overall prices, the economy will continue to suffer from a subordinate rate of expansion in output. This due to the fact that the maximum oil purchase is from out of the country and so the adjustment process may be delayed for a longer time. The answer to the question whether energy independence would result in the isolation of the United States economy from energy price shocks needs to be answered. The reply would be the understanding that the sole way to isolate the US economy from discordant supply abroad would be to balk the exportation of oil. The next alternative would be to check exports for US producers to meet not only domestic needs but also accommodate the world consumption. That is to invade OPEC's market power which would result in a greater scale of domestic production. From this we presume that the rise in oil prices is perpetual and long run in nature. United States would not escape from the risks of oil shocks by just sticking to the point of energy independence. To find a close substitute to non-petroleum energy would help in a big margin to meet the need of U.S energy requirements. This would result in the reduction of oil price shocks. But this significant change is unlikely to be developed in the near future. This remains a question to be answered relating to the betterment of energy efficacy of the environment as the prudent means to curtain the influence of oil shocks. (Labonte; Makinen, 2000) A special report posted on the 25th of March 2006 in the Mercury News states that the march of the gas prices would be up to $3 a gallon by summer which has disturbed the drivers. Prices could even short higher as many oil companies have begun to opt using ethanol as an alternative to fuel cleaning additive, Methyl Tertiary Butyl due to the lurking fears of underground water contamination. (Ricahrds, 2006) The recent hurricanes Rita and Katrina forced an obvious drop in gas production. This led to the sale of unleaded regular gasoline for 2$ a gallon which were shipped from Europe. (Demand-Several factors play into the rise and Oregonians this summer could be looking at 2.5$ a Galion on an average) The local gas retailers observe that rising prices disrupt business and hurt customers. Mr. Akard of Longview said that the rise in the gas prices although does not affect the supply and demand immediately, essentially drives the market in the long run. Sam Shams, the manager at Stop and Go spelt out that they were losing money on the gas since they have to bear the hike to beat store competition. (Retailer: Climbing Gas process bad for Business) Parallel liberalization of the industry of gas and electricity upholds the possibility of a downstream combination into electricity gas as it can be observed in North America and United Kingdom. It is to be noted that the gas industry is reconstructing itself to meet the forthcoming challenges. This will have a significant impact on future investments on gas. In conclusion we must take into consideration the paradox of expanding demand despite expanding price. (Mitchell; Selley, 2001) Another effective suggestion is when gas is priced in minutes of work with the average wage per gallon instead of dollars then the price high would be impotent. (Perry, 2005) On the other hand Optimists hopefully propose an effective way out of the price hike would be worked in the availability of cheap supplies of natural gas. But the industry economists feel that it would be a utopian wish. (Ignatius, 2004) REFERENCES Bonsor, Kevin. Grabianowski, Ed. "How Gas Prices Work" Retrieved from http://travel.howstuffworks.com/gas-price.htm Accessed 25 March, 2006 Brain, Marshall. "How Gasoline Works" Retrieved from http://science.howstuffworks.com/gasoline.htm Accessed 25 March, 2006 "Demand-Several factors play into the rise and Oregonians this summer could be looking at 2.5$ a Galion on an average" Retrieved from http://www.oregonlive.com/news/Oregonian/index.ssf//base/news/1143255388179210.xml&coll=7 Accessed 26 March, 2006 Ignatius, David. (1 June, 2004) "Why Gas Prices are too Low" Washington Post. p. A23 Labonte, Marc; Makinen, Gail. (17 November, 2000) "Energy Independence: Would it free the United States from Oil Price Shock" CRS Report for Congress. Retrieved from http://www.ncseonline.org/nle/crsreports/energy/eng-74.pdf Accessed 25 March, 2006 Mitchell, John V; Selley, Norman. (2001) "The New Economy of Oil: Impacts on Business, Geopolitics and Society" James & James/Earthscan. Perry, Mark J. (1 June, 2005) "Gas Prices Too High Not by Historical Standards" USA Today. p. 12 "Retailer: Climbing Gas process bad for Business" Retrieved from http://www.news-journal.com/news/content/news/stories/0352006gasprices.html Accessed 26 March, 2006 Ricahrds, Gary. (25 March, 2006) "Gas prices flying back up: Ethanol supply worries are factor" Mercury News. Retrieved from http://www.mercurynews.com/mld/mercurynews/news/14185134.htm Accessed 26 March, 2006 Read More