Impact of Gasoline Price Fluctuations - Case Study Example

Gasoline Prices in USA The present paper deals with the movements in the gasoline prices in USA – more specifically, the causes and the effects of the gasoline price movements. The fluctuations are found to be very high in this case and so are the effects of these deviations. The impact can be as dire as one leading to inflation, and since the economy is so highly dependent on gasoline, the vulnerability of the nation rises. Table of Contents Introduction 3 Purpose of the study 4 Causes behind gasoline price fluctuations 4 Impact of gasoline price fluctuations 6 Conclusion 7 Reference 7 Introduction Gasoline is one of the most useful products of crude oil. It is a mixture of inflammable volatile hydrocarbons processed out of crude petroleum and used for the combustion of internal engines. Gasoline is most commonly used as a fuel in vehicles which makes it one of the most important commodities in human life today. One of the characteristics of a necessary item is that its price should stay within the affordable limits of the general public, so that they are not deprived from its usage under any circumstances. But, gasoline price is found not to adhere to this rule and had often been subjected to wide variations, a consequence of similar variations in oil prices. The impact of such price movements is more intensely felt in the Western economies where almost every household owns a car. The following diagram is evidence of the wide fluctuations in gasoline prices in USA over five years (2004-2008). In fact, the mean and standard deviations of the gasoline prices, which are 251.38 (cents per gallon) and 62.15, over the five year span being considered, are also evident of wide variations in the same. Purpose of the study The present study tries to investigate the causes and effects of wide fluctuations in gasoline prices in context of the US economy. USA being one of the highest GDP earning nation in the world and also the one with the highest per capita income, is a good ground for the study since oil has become more like a mode of daily life for the Americans. Hence, any fluctuations in the price level of the same, will have a widespread impact on the lifestyle of the nationals. The research outcome will help the residents of the country to get more aware of the possible impact of a rising oil price and thus they will be in a position to anticipate beforehand how they might be affected when subjected to such price fluctuations, and thus shield themselves accordingly. Causes behind gasoline price fluctuations 1. Monopoly of OPEC - The fluctuations in oil prices and hence that of gasoline could be owed to a large proportion of oil being produced in the Middle East nations which, having formed an organization in themselves (OPEC) enjoy almost a monopoly power over the price movements of the same. Gasoline too is produced in the refineries of these oil producing nations from where it is exported to a number of nations. Although these nations claim to have a control on the price movements of oil and its products, the process which they follow are not strict enough to accomplish the purpose. 2. Increasing demand globally Post liberalization, the world has witnessed the emergence of a number of market economies that have found a way towards attaining development and growth within a very short span of time. Development has enhanced the per capita income level in such nations and thus there has been an upliftment in the standard of living of the nationals. This has led to an increased demand for fuel coming from such economies. These nations like India and China are highly populated as well, which intensifies the demand coming from them. 3. Smoothness in the distribution network The production of oil is mainly concentrated in the Middle East nations and those others enlisted with the OPEC, from where it is spread throughout the world. Since the distance to be covered is so huge the trade circle comprises of a number of distribution channels, which increases the vulnerability of the product. Any disturbance in a channel, caused from a natural calamity or a political exigency can disturb the entire circle. 4. Fall in the value of US dollar The price of oil is mainly denominated in terms of number of US dollars per barrel of oil. A fall in the value of US dollar will lead to a rise in the price of oil and hence its products. From the pie diagrams shown below, it is obvious that the price of gasoline had been moving in proportion to the general price level in the USA over the five year span of 2004 to 2008. The lowest average gasoline price (cents per gallon) is noticed in 2004 which complies with that of the annual average price level of all items in USA. In fact, the values of the two variables over the years, when ranked are found to match with one another, implying that the movement in the two variables are symmetric in nature. Impact of gasoline price fluctuations Gasoline being one of the most important commodities used globally, has an almost multiplier effect of a price rise on the general public. A one-time rise in is still admissible, but, when there are wide and unrestricted fluctuations in the price of a necessary item, the aftermath can be terrible. One severe impact of a rise in gasoline prices is inflation. Since oil and gasoline are used in almost all activities in a nation, its price is included in the determining function of the price of other commodities in a nation as well. For instance, when the price of gasoline rises, it leads to a rise in the transportation cost which can well be treated as a rise in the price of raw materials. Now, this rise will be reflected as increased price of the final commodities, thus hiking the general price level and causing inflation. Again, gasoline can also be used for other activities that involve a combustion of engines, e.g., in the operation of high-tech machines in a factory. Thus a rise in gasoline prices might also lead to a fall in the factory production and hence turn up to a fall in the GDP of a nation. But again, a low GDP in the face of a constant aggregate demand, leads to a rise in the general price level, causing inflation. Once inflation sets into an economy, the adversities that the nation faces, are uncountable. The most dire consequence of inflation most experienced by the general public, is joblessness. This is because, in the face of rising commodity price, aggregate demand falls and thus the employers cannot afford to keep back all of his employees, since that would mean having to pay them a regular salary check. Moreover, there also occurs an international trade deficit since a fall in the value of the indigenous currency due to inflation, leads to a rise in price of imports, hence causing a GDP deficit. Thus, inflation can be considered to be an almost vicious cycle with the cycle breaking only after an external big push comes from the government. Conclusion The huge fluctuations in gasoline prices has a widespread impact on economies which are especially inclined towards using it. This increases the vulnerability of economies like USA to the oil and gasoline producing nations of the world and that is why the adversities which they face are almost incomparable to that of other nations with a less dependence on oil. However, with the emergence of a number of market economies, especially those centered around East and South-East Asia, the use and demand for oil has increased globally, thus multiplying the effect of an already fluctuating oil price trend. Reference Data 1: U.S. Weekly Retail. October 26, 2009. Retail Gasoline Historical Prices. October 27, 2009. Read More