According to the Department of Energy, the consumption in the United States of oil products per day is twenty million barrels (Bonsor & Grabianowski, 2012). Out of this amount, close to fifty percent is utilized for motor gasoline. The remaining amount is utilized for jet fuel, distillate fuel oil, and residual fuel among other fuels. One barrel of oil has forty two gallons that yields about twenty gallons of gasoline. Therefore, in the U.S, the daily consumption of gasoline is about one hundred and seventy eight million gallons of gasoline (Bonsor & Grabianowski, 2012). The gas prices affect almost all aspects of the economy. An increase in these prices hurts the spending of the consumers as well as their confidence. Moreover, higher material and higher costs eat into the corporate profit margins and in the long run, bring up the level of inflation. On the other hand, a decrease in the gas prices offer a form of incentive, as the money that would have otherwise been spend on fuel will be channeled into other more productive uses (Pleven, 2012). In this paper, there is going be to a discussion about the gas prices in the United States.
Trends of Gas Prices in the United States
In most cases, the gas prices go up during summer, a time when a large number of people go on holiday. This leads to high demand which in turn brings about an increase in the gasoline prices. It is reported that “cleaner burning summer-grade fuels, which are more expensive to produce, can increase the price as well, but prices don’t always go up in summer” (Bonsor & Grabianowski, 2012, par.5). This can be illustrated in the case of the situation that arose in the year 2001. It is reported that, as on one hand the gas prices soared thirty one percent in the month of April and May, going up to $1.71 per gallon, on the other hand, there was a decline in the gas prices during summer in the same year. (2001) In the year 2004, prices went on increasing beyond the end of the summer travel season for a number of reasons and these included the several hurricanes and the crude oil price increases (Crude oil prices over time are indicated in Graph 1). In the year that followed, Hurricane Katrina caused the prices to increase to $3.07 per gallon in September 2005.Later in time, in the Month of November and December, the prices somehow settled/ Prices rose once more in the year 2011, making President Barrack Obama to make an announcement that a task force should be formed to undertake examination of the oil markets.
Considering the current trend, Pleven (2012) points out that the average price of gasoline went down to $3.79 per gallon in early May, 2012. This was decrease from a peak of &3.941 per gallon that was realized in the month of April, 2012.It is also pointed out that “the forces that drove gasoline up are reversing, and that is helping bring prices back down, though they still remain near record highs” (Pleven, 2012, par.3). It is also reported that, in the current day, there has been easing of the tensions over the nuclear program of Iran, and at the same time, there has been curbing of demand by the softening economies in Europe as well as in the United States (Pleven, 2012). It is also reported that at the same time, “some refineries pegged for closure are coming back online, and bottlenecks in the supply of crude oil are becoming clogged” (Pleven, 2012, par.3). The changes have contributed towards having analysts to engage in tempering with the prediction of the prices for the “summer driving season”. Some months ago, some analysts were pointing out that the pump prices could rise beyond $4 per gallon and could even approach $5 per gallon during summer but in the current day, the same analysts point out that this is greatly unlikely (Pleven, 2012). Most recent data on gas prices in the United States is given in table 1 in the Appendix section.
Determinants of Gas Prices
At a time the gas prices begin to increase, the consumers actually notice. But on the other hand, even if a large number of consumers express the frustration they have over the increased prices, and go to an extend of making an effort to engage in pinning the blame; many people do not have much knowledge about how increased prices occur. Basing on the statistics presented by the department of energy in the United States, in the year 2010 during the month of December, the average price for crude oil was sixty eight percent of average gasoline retail cost (What Determines gas prices?, 2011). The second uppermost cost factor was the state and Federal taxes at an average of fourteen percent and this was followed by the refining expenses and earnings.
A large number of people hold a belief that oil price is the basic determinant of the gas prices but on the other hand, the forces which have an influence on the price of gasoline are somehow complex than it is suggested by numbers (Kilian, 2008). In order to assist in understanding how the setting of gas prices is undertaken, it is helpful to undertake examination of demand, supply as well as taxes and inflation. It is pointed that, as on one hand demand as well as supply receive great attention as being the most responsible for having gas prices that are higher, inflation as well as taxes too are responsible for huge raise in the price to consumers (What Determines gas prices?, 2011).
Demand and Supply
The fundamental laws of demand and supply bring an impact on the gas prices in a predictable manner. The change in gas demand is basically controlled by the population of consumers who are utilizing fuel for their transportation. The increase in the population of those who engage in driving vehicles, especially in the developing countries, has realized expansion in a dramatic way in the few years that have passed. For instance, such countries as India and China having a population of more than one billion people are having an increasing middle class population that is more likely going to utilize additional gasoline in due course. China is setting up about forty two thousand miles of latest “interprovincial express highways by 2020 to accommodate the all new car sales in that country” (What Determines gas prices?, 2011, par. 10). Comparing this to the United States, the country has approximately eighty six thousand miles of the interstate highways. More over, India is planning to build additional twelve thousand miles of express highways by the year 2022. The cars that are going to move on these highways will use more gasoline and this will bring in an increased fuel demand. A large number of countries engage in subsidizing the retail gasoline prices in order to boost industrial growth and also to achieve the people’s general support, bringing about an artificially increased gasoline demand. Changing the subsidy will have an effect on the gas demand equally to increase in price or reduction in price.
Price assists in the allocation of the scarce goods. Even if the gasoline demand is, within the long run, more elastic; minor discrepancies in demand and supply in any of the directions will bring in a great impact, within the short term, on prices. The demand inelasticity implies that in case prices increase, the demand decreases, but to a very low level. The problem comes in when it is considered that there is locking of the people into their life patterns that are there for the short term (What Determines gas prices?,2011, par.13). As on one hand people can engage in changing their consumption on fuel by purchasing cars that are more fuel-fuel efficient or migrating to live near their workplace but, these things take more time. Moreover, the increasing population of the middle class people all over the world will bring in an increasing gasoline demand as they come up with fresh life patterns which encompass driving vehicles. Equilibrium will be brought in by price of gasoline supply with demand. The world market for gas offers the opportunity for setting up such equilibrium.
Taxes and Inflation
It is pointed out that taxes and inflation are responsible for the largest relative raise in the gasoline price (What Determines gas prices?, 2011, par.14). Inflation is defined as “the general rate at which prices of goods/services are rising and conversely, the rate at which purchasing power is falling” (What Determines gas prices?,2011, par.15). Taking the case in the United States, a product that was having a price of one dollar in the year 1950 would have a price of 9.3 dollars in the year 2010. The price of one gallon of gas in 1950 was 30 cents and this price would be 2.79 dollars in 2010 after carrying out adjustment for inflation and also making an assumption that demand, supply and taxes are held constant.
In the United States, the tax charged on one gallon in the year 1950 was about 1.5 percent of the total gas price. But on the other hand, in the year 2011, the local, federal and state tax on one gallon of gallon was about twenty percent of the price. This implies that taxes made addition of forty eight cents on to the increase in price of one gallon. It is reported that the federal tax, state tax, local tax combined with other tax forms made up 18.4 cents, 20.6 cents, and 9 cents for each as of the month of January the year 2011(What Determines gas prices?, 2011). Other nations do have greatly dissimilar tax policies that are linked to gasoline and among these nations; there are those that can make the taxes to be the biggest component of the price. Being a reference point, the taxes as well as inflation made addition of about 2.83 dollars to the increase in the gasoline price in the course of a period of fifty eight years beginning form the year 1950 up to the year 2008. There is great importance of having this point of view when making consideration of the demand and supply impact on gas prices.
Conclusion
There have always been fluctuations in the gas prices in the U.S. over time. The prices of gasoline in the U.S are determined by demand, supply, taxes and inflation. In most cases, prices are expected to increase during summer when more people drive. Moreover, it is also expected that the gas prices will go up in the future following an increased demand that will result form the increased number of middle class people who will definitely want to drive.
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