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High Gas Prices

Course: ENG 302

Date: 30 April 2012

High Gas Prices

Introduction

The hard economic situation in this country has made people sensitive concerning any increase in costs of commodities. Many people are suffering because of the hard economic times. Any changes, however small, elicits debate from people and the increase cost of gas is no exception. People in different sectors have held debates concerning this issue. A few people seem to think that the situation is not bad. Consumers claim that the country has been in worse situations, where gas prices were high and salaries were low. Some blame the economy, while others blame the government. Economic researchers have their own theories concerning the high costs in gas prices.

Gasoline is obtained from crude oil, which has to be refined before usage. Refining crude oil produces products such as petroleum gas, gasoline, kerosene, and diesel, among others. Gas is one of the most versatile fuels used worldwide. The price of crude oil determines the price of gas. When the cost of crude oil increases, the price of gas also increases, usually at a higher rate than crude oil. This is because of factors such as the refining process, distribution and marketing costs, transportation, and taxes. New alternatives such as corn and electrical voltage cars have shown great progress in lessening the dependency on cruel oil; this process will decrease cost, and provide confidents in the market. Numerous factors jointly contribute to inflated gas prices (Orwel, 118). This includes increased demand, disruptions in supply, environmental concerns and regulations, government regulations and taxes, and the high cost of production.

Increased Demand

One of the major reasons for high gas prices is increased demand for the product. Oil reserves supply the world with oil. Some countries that have oil do not have the capacity to develop production. This means that only a few countries around the world have been able to develop their own oil and gas production capacity. As many countries develop, so does the demand for oil increases. The limited supply is therefore not able to meet the market demand. Some countries have also increased their demand for oil because of development in the manufacturing sector, and other sectors. Countries like India and China are the most populous nations in the world. “They have increased their demand for oil, leading to high prices of oil in the world market” (Orwel, 118).

“The US is the world’s biggest user of oil and gas” (Orwel, 121). Many countries are opting to buy more crude oil, as a precautionary measure against any shortages or further price increases that may occur in the future. For instance, China has increased its oil reserves and this has hiked up the price of oil. Population increase and the need for a better lifestyle have increased the demand for gas. Many people can now afford to buy cars, because they have more income. There are more cars on the road today than there ever been. This has increased the demand for gas, as it is the major fuel for cars, trucks and locomotives. Demand for gas also increases during the summer season. This is because many people drive during this time, as they go for vacations (Heinberg, 264).

Supply Disruptions

The US gets most of its oil from Canada and Mexico; however, it also imports from other countries such as Nigeria, Saudi Arabia, Venezuela, Russia, and Iraq. The major oil producers in the world are Russia, Saudi Arabia, US, China, Mexico, Venezuela, Canada, Kuwait and Norway. Over the past few years, the supply of oil in some of these countries has been disrupted because of political uprisings, instability, war, and civil unrest. Civil unrest in Nigeria, Venezuela and some of the oil producing countries in the Middle East has affected the world supply of oil dramatically. The oil production has decreased in these countries, and this means that other countries around the world have to compete for the availability oil, resulting in an increase in the prices (Tanous and Cox, 182).

Oil prices are sensitive to any changes in oil producing companies. For instance, although the US does not get its oil from Libya, the crisis that happened in that country in 2011 caused an increase in gas prices. “The civil unrest in Tunisia, Libya, and Egypt caused an increase in the price of oil, which consequently affected gas prices” (Tanous and Cox, 182). Investors are cautious about investing in oil in some oil producing countries because of the conflicts and the wars in these places. For instance, although there is oil in Iraq, oil companies are reluctant to invest there because of its unsafe and sometimes dangerous environment. “In some cases, the local communities oppose oil production in their regions, and this hinders the production of oil” (Heinberg, 263). Sometimes the supply of oil is hindered by environmental regulations, which hinder further production of the commodity.

Environmental Concerns and Regulations

Environmentalists have sometimes been blamed for high gas prices because of their opposition to further exploration and drilling of oil sources. They have been vocal about their cause, and this has compelled the legislators to establish regulations to protect the environment (Heinberg, 5). People have become more sensitive about the environment. Many environmentalists do not support the production of crude oil, nothing that has a negative impact on the environment. It is a fossil fuel, and it contributes to the increased greenhouse gas emissions, which is believed to be a factor of global warming. They also oppose the production of the oil, noting that the process is harmful and dangerous to the environment, wildlife, and sea life. Many environmental regulations have made it more difficult and expensive for local and foreign companies to sell gasoline in the US. Different states have different gasoline blend preferences, and most of them are influenced by environmental regulations (Hirschey, 751).

Gasoline produced in winter is different from the gasoline produced in summer. This is because the producers have to comply with environmental regulations, and ensure that they do not pollute the air. The gasoline that is produced during the summer season is more expensive than that produced during the winter season. It is more difficult and more expensive to produce this type of gasoline, which this cost is passed onto the consumers. Some states, such as California, have strict environmental air quality laws, and refineries intending to produce oil in these states have to abide by these laws. This makes it more costly for refineries to function in such states. The gas in these states tends to be more expensive than in other states. Cities with high smog levels have often reformulated gasoline. This type of gas is more expensive than conventional gas, but it burns more clearly, has lower emissions, and reduces the toxic pollutants, that cause smog. For all these reasons, gas prices in summer therefore tend to be higher. Strict environmental regulations have also limited the capability of refineries in producing more oil.

Refineries

There are many challenges that oil refineries face, and this has affected their capacity to produce oil. Many refineries have closed down since the eighties because of the high cost of production. The few remaining refineries have continued to deal with high production and operational costs. The refining costs for gas are very high and the refiners pass these costs to the consumers. Refineries are faced with numerous challenges. They do not have the investment to continue production throughout the year. They also have to undergo annual maintenance. During this time, production goes down as the refineries close and as a result produce less gas.

The US produces different blends of gasoline, depending on the region, season, and use of the product. Refineries use different types of oil, and some tend to be more expensive than others are. For instance, Brent crude, which is mostly used to make gasoline, is more expensive than other types of oil. Refineries are also wary and uncertain of new regulations, which propose different requirements for fuel mixes. New compositions of fuel mixes mean that the refineries have to invest more, since they have to buy the proper equipment for mixing the ingredients. The refineries have to drain the gasoline used in winter and replace it with the one used during summer because they do not use the same ingredients (Hirschey, 751).

The US has not built any new refinery in the country for a long time. Since there are few refineries in the country, they have to deal with increasing operational and production costs. Gasoline prices may be significantly higher than the crude oil because the country does not have enough refineries to produce gas (Hirschey, 751). In many cases, the country has to depend on foreign imports of gasoline. This can sometimes be expensive because their prices are based on Brent oil, which is expensive. Some communities have opposed proposals to build refineries. The “not in my back yard” mentality has slowed down the refineries capacity of production. The refineries have to conform to government regulations, which are sometimes expensive to follow.

Government Regulation and Taxes

The cost of gasoline includes of the taxes imposed by the government on the state, local and federal level. Taxes levied on gas are high, and this makes the price of gas costly because the taxes are included in the price of the gas. Producers pay 10% of federal and state taxes to produce one gallon of gas (Clough, 18). Government regulations are sometimes tied to environmental regulations. Some years back, the government decided to replace MTBE with ethanol to comply with the clean air act. MTBE is cheaper than ethanol, and this transition resulted in a decrease in production capacity. Many people see the production of domestic oil as the solution to high gas prices. They argue that offshore drilling will increase the supply of oil and gas, and the country will be less dependent on expensive foreign oil. The government has banned offshore drilling in some areas as a way of protecting them. Offshore drilling can affect the ecosystem of the region; it has negative consequence for some species. For instance, it can harm the whale species and affect the whale population in the sea (Reed and Fitzgerald, 240). The government cannot influence the production of crude oil, which is used in the manufacturing of gas.

Price and Production Controls

Oil producing companies under OPEC (Organization of the Petroleum Exporting Countries) are found in Saudi Arabia, Qatar, United Arab Emirates, Iran, Iraq, Kuwait, Venezuela, Ecuador, Libya, Nigeria, Algeria, and Angola. These countries hold the majority of the oil reserves in the world. OPEC controls and determines oil prices by controlling oil production (Orwel, 117). For instance, although Saudi Arabia has the largest oil reserves in the world, it limits supply by controlling production. This means that its available oil is sold at higher prices, thus affecting the price of gas. Although OPEC can urge member countries to control their production, they do not determine the price of oil in the market, as many speculators have bought their share of the commodity and they determine the price of oil by bidding on the prices.

Speculators

Speculators affect gas prices when they trade at the commodities market. This involves buying the commodity at a certain price, to sell later at an agreed price. When the traders bid high prices, the prices of the commodities increase. Investors at the commodities exchange speculate on the future price of oil. If they expect that the oil prices will be higher in the future, they bid higher, and this affects the price of gas. More investors are choosing to put their money in oil instead of investing in other stocks. The speculators use different factors to determine the price of oil. They can use the quota set by OPEC, reserves in oil producing countries, and oil demand in the country. Equity returns for oil are great, and the investors are heavily trading in the market. “This has added liquidity in the oil market, and has caused the price of oil to increase” (Orwel, 117). Speculators follow the exchange rate closely since oil is priced in dollars. Therefore, price of oil increases when the value of the dollar decreases. Speculators look at data from different sources and they look at the directions of the oil companies when determining the prices.

Oil Companies

The big five oil companies in the US control more than 50% of the refining business in the country (Clough, 108). Three of the five include Exxon-Mobil, Chevron, and Conoco-Phillips. Oil companies continue to rake in huge profits because of oil prices. They are involved in all the aspects of the oil business, and this means that they have a say in controlling the price of the commodity. The oil companies are involved in the exploration and production of oil and gas, manufacturing and refining petroleum products, marketing, wholesaling, retailing, and transportation of the oil products. The oil companies make profits on all the processes. The costs they use in these processes are included in the final cost of gas and other oil products. Gas stations are the major outlets that the oil companies use to retail their gas. This enables them to control fuel prices. Even though not all oil companies own gas stations, but they are able to control prices because of the agreement they have with gas stations operators. Oil companies have different types of arrangements with the gas stations. The arrangements include lessee- dealers, open dealers, jobber dealers, independent dealers, and company owned stations (Clough, 53).

A lessee dealer buys the price of gas at the Dealer Tank Wagon price, which is the price set by the oil company. The dealers lease the station, equipment and land from the oil company or the retailer, and they pay the price of gas from the retailer. The oil companies are able to determine and control gas prices using this arrangement because they control the lessee amount, and they determine the gas price. The dealers use this amount to determine their own gas prices. The dealer in the open dealer arrangement has more control over the business as the owner of the property and the equipment, although he or she is still bound to the Dealer Tank Wagon price. The refiner supplies the dealer with the gas, and the dealer sells the gas under the refiner’s brand have. (Clough, 54).

The jobber arrangement is a different arrangement with the oil company or the refiner. The dealers under this type of arrangement buy branded or unbranded fuel at a rack price from the oil company. The dealers then distribute the oil to their own gas stations or to other gas stations. In most cases, the dealers under this kind of arrangement agree with the refiner to buy a set amount of the branded fuel. An independent dealer is not bound to one specific retailer. The dealers buy unbranded fuel from the retailer selling at the lowest price. The oil companies are able to raise and control the price of gas using any of these arrangements. Although the independent dealers seem to have more freedom, since they do not have long-term contracts, they are nevertheless not able to determine the oil price at the market (Clough, 55). There are few retailers and oil companies in the United States, and their prices do not have a wide margin. Oil companies seem to have more voice in the price of oil, but they cannot prevent some factors, such as natural disasters from happening.

Disasters

Natural disasters can cause an increase in gas prices. For instance, gas prices increased after hurricane Katrina and hurricane Rita. Gas prices also increased when the Mississippi river flooded. Disasters affect the country’s oil production capacity and disrupt the supply (Orwel, 124). Hurricanes disrupt the supply of oil for a short time because they can damage, and sometimes destroy, offshore drilling rigs.

Summary and Conclusion

There are many factors causing the high gas prices around the country; it is difficult to point out one specific factor. Some of the factors can be rectified easily, while others will require a long time, and will involve policy changes. For instance, the US is the biggest user of crude oil in the world. It is possible to reduce the amount of gas used by reducing the gas used in the cars. Many Americans prefer using their own cars, rather than using public transport, walking, or cycling. Another way that people can reduce the demand for oil is by using alternative sources of energy. The government cannot influence the happenings in other counties. It cannot stop the wars or the civil unrest that occurs in some of the oil producing countries; however, it can ensure that the country has enough oil, by ensuring that the refineries perform to their full capacity. It should help the refineries by lowering the production and operational costs. This will ensure that the country has enough supply, which will offset the demand. The government cannot control some of the factors causing the high gas prices, such as natural disasters and the price of crude oil but it should do all it can to ensure that the people do not suffer because of the high gas prices.

Works Cited:

Clough, G. Richard. The Truth behind High Fuel Prices. Fort Worth: Fullness Publishing, (2006): 18-108. Print.

Heinberg, Richard. The Party’s Over: Oil War and the Fate of Industrial Societies. London: CLAIRVIEW BOOKS, (2009): 5-264. Print.

Hirschey, Mark. Managerial Economics. New York: Cengage Learning, (2008): 751. Print.

Reed, Stanley and Alison, Fitzgerald. In Too Deep: BP and the Drilling Race That Took it Down. Hoboken: John Wiley and Sons, 2011. Print.

Orwel, George. Black Gold: The New Frontier in Oil for Investors. Hoboken: John Wiley and Sons, (2006): 117-124. Print.

Tanous, J. Peter and Jeff, Cox. Debt, Deficits, and the Demise of the American Economy. Hoboken: John Wiley and Sons, 2011. Print.

Thesis Statement: Numerous factors jointly contribute to inflated gas prices. This includes increased demand, disruptions in supply, environmental concerns and regulations, government regulations and taxes, and the high cost of production.

High Gas Prices

Outline

General Purpose:

To inform

Specific Purpose:

To inform the readers of the many factors that contributes to increased gas prices.

Central Idea:

The government is not the sole factor in determining gas prices, as there are many regulators and controllers in the field.Introduction Attention material: These hard economic times have made people more sensitive to increased gas prices. Everyone seems to have a theory concerning the increase in the gas prices. Credibility material: I have used diverse sources from different authors. Some of the authors have worked in the oil industry for a long time, while others have worked for the government and the press, covering different issues concerning oil. Preview: I will explain the basic elements of gas production and show the many factors that determine gas prices.

Transition: Many factors contribute to the high gas prices in the country and it is difficult to point one specific reason.

Discussion Increased demand

1. Many developing countries are increasing their demand for oil.

2. More countries are increasing their oil reserves.

3. Increased demand has resulted from the improved living standards.

Transition: increased demand of oil cannot be a big factor of high gas prices if there is sufficient oil to meet the new demand

Supply disruptions

1. Many oil-producing countries are involved in war and civil conflicts.

2. Community opposition to oil production can disrupt transportation oil.

3. Political instability can result in a reluctance of investors to invest in oil producing countries.

Transition: Sometimes the supply of oil is hindered by environmental regulations, which hinder further production of the commodity.

Environmental concerns and regulations

1. Environmentalists oppose further exploration and drilling.

2. Strict environmental regulations make it hard for some oil companies to sell to the US.

3. Different blends increase the cost of production.

Transition: Strict environmental regulations have also limited the capability of the refineries to produce more oil.

Refineries

1. Many refineries have closed due to the increased cost of production.

2. This causes a lack of enough refineries for gas production.

Transition: The refineries have to conform to government regulations, which are sometimes expensive to follow.

Government regulations and taxes

1. High government taxes raise the price of gas.

2. Government is ready to comply with the environmentalists who are placing a heavy burden on the refineries.

Transition: the government cannot influence the production of crude oil, which is used in the manufacture of gas.

Price and production controls

1. OPEC is a major factor in determining the price of crude oil, which is used in the manufacture of gas.

2. The organization also determines the supply of crude oil in member countries.

Transition: Although OPEC can urge member countries to control their production, they do not determine the price of oil in the market, as many speculators have bought their share of the commodity, and these spectators determine the price of oil by bidding.

Speculators

1. Speculators determine the price of gas by bidding.

2. If the speculators’ bids are high, the price of gas also increases.

Transition: Speculators look at data from different sources and they look at the directions of the oil companies regarding prices when determining price.

Oil companies

1. The big five oil companies in the US control more than 50% of the refining business.

2. Oil companies are involved in all the processes of oil production.

3. They make profits in all the processes of production.

4. The companies use gas stations to control the price of gas.

Transition: Oil companies seem to have more voice in the price of oil, but they cannot prevent some of the factors, such as natural disasters, from happening.

Disasters

1. There is evidence of increase in gas price after major disasters, especially hurricanes.

2. The hurricanes disrupt the supply by destroying the offshore drilling rigs.

III. Summary and conclusion

Many factors affect gas prices and it is hard to point out a specific one. Some factors can be rectified easily while others need policy changes.

Bibliography

Clough, G. Richard. The Truth behind High Fuel Prices. Oil and Gas Prices, 2006. Print.

This book is important for this study because it contains in-depth information concerning the working of the oil companies. The author owned a gas station, and he therefore knows how the stations work. He has written a lot concerning oil companies, and he has examined how the companies control the gas stations and the price of gas.

Heinberg, Richard. The Party’s Over: Oil War and the Fate of Industrial Societies. CLAIRVIEW BOOKS, 2009.

Many people in the oil industry and the economic analysts consider Heinberg as an expert in the oil field. He has written many books, whose main message is the need to transition from using fossil fuels. He is an educator, concentrating mainly on peak oil, and he is a senior fellow at Post Carbon Institute. He has written many books, and his articles have been published in different journals such as European Business Review, Earth Island Journal, Public Policy Research and the Pacific Ecologist among others.

Hirschey, Mark. Managerial Economics. New York: Cengage Learning, (2008): 751. Print.

Mark Hirschey was a professor in business studies, and he held that position for a long time. In the book, he has examined different business topics, and has looked at the impact of the economy on various commodities including oil. In the chapter ‘Production and Competitive Markets’ he has looked at price ceilings, especially in relation to OPEC. He has noted that the organization has often failed in its attempt to restrict the supply of oil. He has also observed the impact of the demand of oil in the short term and long term, noting that in the long term, the high prices of oil lead to sharp reduction in usage.

Reed, Stanley and Alison, Fitzgerald. In Too Deep: BP and the Drilling Race That Took it Down. Hoboken, NJ: John Wiley and Sons, 2006. Print.

Stanley Reed and Alison Fitzgerald are journalists who have covered diverse issues concerning the Middle East, oil and government policy. Reed has specialized, and reported on energy issues. He has researched the British oil company BP, and he has visited and researched information on the Gulf of Mexico. Fitzgerald specializes in different economic news. In the book, she has noted the impact of the gas prices on the economy.

Orwel, George. Black Gold: The New Frontier in Oil for Investors. Hoboken, NJ: John Wiley and Sons, 2006. Print.

Orwel is an oil analyst, and he writes articles for the Oil Daily and the Petroleum Intelligence Weekly. He is a journalist who has worked with some of the major news channels and newspapers in the world. He has gained a lot of experience working in the field. When writing this book, he has used his experiences and insight from different people around the world.

Tanous, J. Peter and Jeff, Cox. Debt, Deficits, and the Demise of the American Economy. Hoboken: John Wiley and Sons, 2011. Print.

The authors in the book examine the crisis that has led America to be in the volatile economic situation that it is today. One of the chapters in the book entitled ‘The World Still Runs on Oil’ the authors examines the price of crude oil over the years since 1861. They observe that the economy influences the price of gas because of inflation and interest rates. The authors are well versed on the general economic trends and the country’s economy.

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