Potential reasons for the increase of gas prices - Essay Example

Running Head: Increase of Gas Prices Potential Reasons for the Increase of Gas Prices [Institute’s Potential Reasons for the Increase of Gas Prices One of the oldest and still-in-demand resources is the Natural Gas around the world, which is still being used in under-developed, as well we, developed parts of the world. However, demand and supply of this valuable mineral resource has been in variation due to a number of reasons. In this regard, price of the gas has been one of the reasons that have affected its market, as well as, its supply in different parts of the world. This paper will try to discuss and analyze different causes that have resulted in the increase of gas prices in the world market, especially since last decade. Since last decade, gasoline prices have increased due to a number of factors that have contributed to its increment in the world market. In this regard, experts and economists have identified a number of factors that have contributed to the high prices of gasoline around the globe. Refining capacity has been identified as the biggest identified factor for the high prices of gas. Even if economical oil were available in the market, the prices of gas would still be high due to its process of conversion from the oil. When scarcity is observed in the supply of gasoline, it has been noted that utilization of gas is done in a limited manner. Thus, supply and demand law of the economics plays a crucial role in the increase of gas prices. One of the examples for this law is that even if the supply of gas would be very high, the pumps would be found with out of fuels signs on the gas stations, as the utilization of gas would not be decreased, and rather increased due to its cheap cost. Thus, demand and supply would always be invertible, and thus, gas prices have been increased due to its scarcity, as well as, its demand around the globe. However, one of the advantages of high prices of gasoline is that consumption of fuel is discouraged by the high prices that cannot be afforded by everyone. (MacEachern, pp. 44-48, 2005) 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. Gasoline is produced by converting only fifty-one percent of an oil barrel. Subsequently, heating oil, jet fuel, refinery gas, and a number of other oil products are produced by rest of the oil barrel. In the result, the role of a high demand commodity is played by the oil, and as oil is not produced by most of the countries, import of oil has been a regular and necessary practice in most parts of the world. (Jaffe, pp. 23-25, 2006) This also results in the increase in the high prices of the oil and gas around the globe. Thus, fluctuation of prices can vary due to the demand and supply of different countries in a global oil and gasoline market. For instance, a flourishing economy has been represented by China, which has resulted in its high requirement of oil, as compared to its oil and gas requirement in the previous years. In the result, crude oil becomes shortage due to an increment in its global demand, and consequently, gasoline, jet fuel, lubricants, and prices of similar products become high. 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. Another major factor of the increase in oil prices is the distance of oil-producing country and the consumer country, as shipping costs vary from country to country. However, a number of complexities are included in this factor, as different countries have imposed different taxes on the import of oil or oil products in their region. In the past, the price of oil barrel was quite similar to the price of gasoline. If scarcity were observed in the supply of crude oil, the increase in oil would result in the same increase of gasoline. However, irregularity has been observed in the prices of gasoline since the last decade, which has been different with the prices of oil barrels in the region. In this regard, it is important to identify the real factor of the increases of gas prices. In the year 2005, $70 was the price of an oil barrel, and a gallon of gasoline costs $2.85. In the early months of 2007, price of oil barrel decreased and $60 was the price of an oil barrel. In contrast, a gallon of gasoline costs $3.25 during the same time. Later in the same year, oil prices climbed up to its peak and $98 was the price of an oil barrel, but on average, $2.95 was the price of a gasoline’s gallon. Thus, it can be noted by such analysis that the price of gasoline has been increasing by some other factors that are affecting its prices adversely. When the oil is received by the oil companies, refining facilities are supplied with the received amount of oil that is located in different parts of a country. The production of oil products, such as jet fuel, lubricants, gasoline, and earlier mentioned products is the responsibility of the refining facilities after the conversion of given amount of crude oil. As earlier mentioned in the paper, our cars are powered by gasoline that is produced by about fifty-one percent of an oil barrel. When the increment is observed in the demand of gasoline, operating capacity of these facilities is turned to its maximum, in order to supply as per the demand of the market. (Jaffe, pp. 54-59, 2006) However, increment of gas demand keeps on increasing even if the maximum operating capacity is utilized by the refinery facilities for the conversion of crude oil for the production of gasoline. In the result, the law of demand and supply once again plays its crucial role, and increment is observed in the price of gasoline due to the high demand and the same amount of supply by the refinery facilities. This can be another important and potential factor for the increases in the gas prices around the world. In this regard, a number of economists have suggested for the creation of new refinery facilities, especially in the United States. However, building of new refinery facilities for the conversion of crude oil into gasoline and other oil products has been prohibited by the Environmental Protection Agency. From the year 1975 to 2000, the creation of only one refinery was permitted by the EPA in the United States. In other words, a new refinery has not been built in the last twenty-seven years in the country. The profit making of the oil companies has also to do with the higher prices of the gasoline. For instance, if the prices of gasoline will be cheaper, the large profits of the oil companies will be cut into smaller profits, and thus, another possible factor for the increases in the oil and gas prices have been the intention of larger profits by the oil and gas refinery companies. (IEA, pp. 30-33, 2006) In the year 2005, multi-billion profits were made by some of the biggest oil companies in the United States. Remarkably, higher profits than the profits of year 2005 were achieved in the year 2006 by the same companies. Building of new refiners was avoided, and salaries of the workers and employees in these companies were regarded for the provision of bonuses in response of the multi-billion profits. (MacEachern, pp. 76-79, 2005) In fact, it has been noted that a number of refineries are being closed by one of the oil companies in the United States, which would increase the prices of gasoline adversely. The problem of the higher prices of gasoline would be worsened, and profits will be larger than the year 2006. Thus, the profit making intention of the oil companies is a significant reason that has resulted in the higher prices of gasoline around the world. In addition, another most important reason of the increases in the oil, as well as, gas prices is the commencement of a series of wars in the Arabian countries. The Arab countries have always been rich in the oil production, and thousands of oil wells in these countries have always resulted in a number of wars due to high value and demand of the oil resource. Since some years, Iraq has been in the situation of war with the United States and other US-supporting countries of the world. In the result, the supply of oil has been deteriorated due to war, and has once again, implemented the law of supply and demand, which has resulted in the increase of gas prices in different parts of the world. Conclusively, this paper has tried to discuss, analyze, and compare a number of factors that are responsible for the increases in the prices of oil and gas resources in different parts of the world. Nothing can be done to overcome this problem, as the economics law of supply and demand will always be resulting in the increase of these prices. However, oil companies can make some difference in this increment, and may result in the reduction of gasoline prices. It is hoped that this paper will help students, experts, and economists in their understanding of potential factors for the increases in the gas prices. References Amy Jaffe. (2006). Natural Gas and Geopolitics. Cambridge University Press. Diane MacEachern. (2005). Beat High Gas Prices Now. Andrews McMeel Publishing. IEA. (2006). Energy Policies of IEA Countries. OECD Online Bookshop. Read More