|
|
This is only a preview of the paper
Click here to register and get the full text.
Existing members click here to login
|
|
|
Gasoline Price Elasticity
Of Demand
Michael Marlatt
Business Economics
BSM 407
Jodey Lingg
June 8, 2003
The avoidance of serious disruptions in oil supplies and oil price spikes have been a major concern for the welfare of economies since the beginning of the 20th century, whether those concerns are imagined, anticipated, potential, or real threats. ... Only cost and price matter” (Adelman, 1995, p. ...
The above preface, though simplistic, is a statement about world oil production and consumption, but at what price. ... Gasoline is no different. There are several determinants for price changes, some more prevalent than others. Current fluctuations in gasoline prices are more a result of the market’s inelasticity rather than from increases in the underlying petroleum market thereby increasing market volatility. ... The refining process usually involves 1) distillation, which separates the heavier products from some of the lighter products; 2) conversion, or squeezing a higher percentage of light products, such as gasoline, from each barrel of oil; and 3) treatment, or improving of the quality of the product which could entail removing sulfur from different fuels. The addition of blending components to gasoline is also part of this process. ... 4 gallons of finished motor gasoline, as well as smaller quantities of many other petroleum products. ...
Product Gallons
Finished Motor Gasoline 19. ... 56
Price Determinants
The components of the retail price of gasoline breakdown approximately into the following associated details and their respective percentages for the years of 1999 and 2000 (EIA, July 2001).
1999 Average 2000 Average
Retail Price Retail Price
$ 1. ... 48/gallon
1999 2000
Crude oil 37% 46%
Federal, State and local taxes 36% 28%
Refining costs and profits 13% 14%
Distribution & marketing and retail 14% 12%
station costs and profits
Why do gasoline prices fluctuate? “Even when crude oil prices are stable, gasoline prices normally fluctuate due to factors such as seasonality and local station competition. Additionally, gasoline prices change rapidly due to crude oil disruptions stemming from world events or domestic problems such as refinery or pipeline outages” (EIA, July, 2001).
Taxes – Federal, State and local agencies can levy taxes (per gallon) on the sale of gasoline, most, if not all of which is passed on to the consumer.
Seasonality – The demand for gasoline causes prices to rise somewhat in the summer when people tend to drive more and decline somewhat in the fall and winter as people drive less.
Changes in the cost of crude oil – These changes sometimes wreak havoc on the price of gasoline. ...
Product supply/demand imbalances – A continuing economic boom in the United States has led to greater demand of gasoline. If demand rises quickly or supply declines unexpectedly due to refinery problems or lagging imports, gasoline inventories (stocks held in storage at retail or wholesale outlets) may decline rapidly. ...
Prices of basic energy (gasoline, electricity, natural gas, heating oil) are generally more volatile than prices of other commodities. One reason is that consumers are limited in their ability to substitute between fuels when the price of gasoline, for example, fluctuates. ...
The forces of supply and demand interact together as they establish prices and influence the way our economy operates. ...
When demand is greater than supply, prices rise. ... When supply is greater than demand, prices fall. ... Supply and demand help stimulate and when necessary, regulate competition and prices.
The law of supply and demand still shapes the petroleum industry but at the same time consumers are sometimes at its mercy and must make hard decisions regarding their choices. ... ], “given the low price elasticity for gasoline, relatively small short-term supply reductions (or demand increases)” can translate into dramatically higher prices at the pump” (The Society of Independent Gasoline Marketers, 2001).
Approximate Word count = 2924
Approximate Pages = 11.7
(250 words per page double spaced)
|
|
|
|
|
|