Bonilla Johan Econ Final PDF

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Bonilla 1 Johan Bonilla ECON 2301 Edson Timana 15 April 2019 Gas Prices: Not Just Supply and Demand It is almost without a doubt that gasoline and oil play a big role in the economy of both the United States of America, and the global market of the world. This resource has become such an important factor of production because not only it is essential in fueling our motives of transportation (from cars to planes), but because gasoline and crude oil is also equally or even more important in the industrial production of many of the commodities in our life. It is often common to apply the concept of supply and demand to gasoline prices and call it a day, and although this is definitely a large portion of the explanation, other variables should also be taken into consideration, as they can in fact affect (if even in the smallest percentages) the prices of our gasoline. According to the U.S Energy Information Administration, “in 2018 the United States consumed an average of about 20.5 million barrels of petroleum per day , or a total of about 7.5 billion barrels of petroleum products”. In fact, CNN Business states that as of last year in 2018, “the United States is the world’s largest producer of crude oil”. This event occurred for the first time since 1973, and interestingly enough is being accredited to the shale oil boom of Texas (primarily in the Permian basin of west Texas). This increased production, and the relatively low oil and gas prices that we are currently enjoying at $2.830 per gallon, should definitely be associated to an increase in the supply of oil. This, of course, is basic economics. As supply decreases, prices go up, and as supply increases, prices go down. Sure, our car technology is increasing, and as the years go by we create more fuel-efficient cars, but if we look at things with a more realistic view, the fact of the matter is that we currently have a large supply of gasoline, and a level of demand for that gas that is not proportionate. As I’ve stated before, this huge sector of our economy should not be simplified to just supply and demand, and in fact, other intricacies should be considered. The graph below generated from the Federal Reserve Economic Data (FRED), demonstrates that price of conventional gasoline is very volatile, and often rises and drops drastically even within the same year.

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Although, again, this graph is a representation of supply and demand, the price of oil is also affected by agreements in a sort of “oil futures market”. As Investopedia defines it “an oil futures contract is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future”. This basically means that whatever was predetermined by the contract must be honored by both the seller and the buyer, despite the current state of the market or the amount of supply available. This futures market is affected largely in part by “hedgers”. One of the most prominent hedgers in the particular market we are examining are companies that utilize high amounts of gasoline, like airlines. It is common for airlines to buy oil futures so that they do not have to worry about profitability of future business and can continue to pay the same unraised price for long periods of time. Another very important factor that we seldom take into consideration when we think about the fluctuations in our gasoline prices, is the effect of public sentiment and opinion. In other words, expectation is a determinant/shifter of demand. If consumers expect the price of gasoline to go up in the future, the demand for gasoline in the present increases, and vice versa. If the consumer expects prices to go down, they demand less of the gasoline in the present. This is especially important since the laws of demand tell us that if demand increases but the supply of gasoline remains the same, then the equilibrium price and quantity are expected to increase. Similarly, if the demand decreases but the supply of gasoline remains the same, then the equilibrium price and quantity are expected to decrease.

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However, the graph above generated by FRED demonstrates oil and gas extraction and production are not on the decline and have an overall increasing positive trend. As alluded to earlier, the potential supply of gasoline is actually increasing domestically in the United States. As The New York Times put it, “production has nearly doubled over the last six years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices”. This increased supply definitely has something to do with our gas prices staying low according to Investopedia, also stating that the only reason “we’re not awash in cheap oil is because...production is high…but distribution and refinement aren’t keeping up”. One last factor that could potentially affect the price of gas is the Organization of Petroleum Exporting Countries (OPEC). This group is an international cartel consisting of 14 nations (Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Republic of Congo, Saudi Arabia, United Arab Emirates, and Venezuela) that control 44 percent of global oil production and 81.5 percent of the worlds oil reserves. In essence, since they hold such a large portion of the oil industry, no matter what any other oil producer in the world does, the reduced or increased oil production by OPEC can cause the prices of oil and gasoline to raise or lower. However, lets hope they stick to their mission statement, which goes “coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers”. In the end we conclude that oil prices cannot be accounted for only by simple supply and demand. Things like cyclical trends, sentiment, futures markets and contracts, and market forces like OPEC can also affect the going rate for our cars fuel. In the bigger scope of things, we may have very little control over the price of gas that we pay as consumers, but as long as our commodities and methods of transportation keep relying on oil, it will continue to be high in demand and a big contributor to our GDP. The next time you’re pumping gas and complain about the price to the gas station owner, just know, it’s not that simple. Works Cited Chang, Dongfeng, and Apostolos Serletis. "Oil, uncertainty, and gasoline prices." Macroeconomic Dynamics 22.3 (2018): 546-561.

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For the first time since 1973. “America Unseats Russia, Saudi Arabia as No. 1 Oil Producer.” CNNMoney, Cable News Network, money.cnn.com/2018/09/12/investing/us-oilproduction-russia-saudi-arabia/index.html.

Kosakowski, Paul. “What Determines Oil Prices?” Investopedia, Investopedia, 5 Apr. 2019, www.investopedia.com/articles/economics/08/determining-oil-prices.asp.

Krauss, Clifford. “Oil Prices: What to Make of the Volatility.” The New York Times, The New York Times, 15 May 2017, www.nytimes.com/interactive/2017/business/energyenvironment/oilprices.html? mtrref=undefined&gwh=1257527EDDC5F3B2514036DE1A73E221&gwt=pay.

Wong, Kristin, and Kristin Wong. “What Cheap Gas Means for the Economy (and Your Wallet).” Two Cents, Two Cents, 12 Jan. 2016, twocents.lifehacker.com/what-cheap-gas-means-forthe-economy-and-your-wallet-1752384280. “Do Falling Oil Prices Help Or Hurt The U.S.?” OilPrice.com, oilprice.com/Energy/OilPrices/Do-Falling-Oil-Prices-Help-Or-Hurt-The-US.html....