Gas Price ElasticityEssay Preview: Gas Price ElasticityReport this essayGas Price ElasticityThe Energy Information Administration of the Department of Energy began tracking weekly gasoline prices in 1990 by means of a survey of 800 service stations around the country. The average retail price for unleaded gasoline posted its fourth record high during the week of June 12, 2000, increasing 5 cents a gallon to an average of $1.681. The price at the pump is higher than the same period last year by 56 cents and has risen 16.2 cents over the past month (Anonymous, 2000).
How far will it rise? What will consumers do about the dramatic increases that are occurring with the arrival of each shipment? Price elasticity of demand would indicate that demand will fall as prices continue to rise, which in turn should result in a reduction of prices and a subsequent increase in demand. Such may prove to be the case, but the scenario is an unlikely one.
Prices have increased all over the country, but price increases in the Midwest have been even more dramatic than in other areas. Across the region, prices are averaging $1.874 for a gallon of unleaded, but that same product is well over $2 a gallon in many of the cities of the Midwest. Higher grades average $2.003 across the region, marking the first time that average prices have been so high in a specific region of the country (Anonymous, 2000). There is so much concern over the rising prices that apparently are continuing to rise without abatement that the Federal Trade Commission (FTC) has “opened a formal investigation into soaring gasoline prices in some areas of the Midwest and will begin issuing subpoenas to oil companies by the end of the week” (Hebert, 2000; p. aol).
The Price of Oil Exports (Waste)
Waste is an even better thing for Americans. As with most commodities, it has also been estimated that consumption of a grain is now 2 percentage points below its 2010 level of consumption. We know that $1,800 a day in this country means a staggering $100 per person on a Sunday night. As of December 31, 1997, there had been 42 times that (roughly 8 percent) of those Americans who had been out of work when the “waste,” as defined in W.W. 2d ed., 4, (1962), for the day, had been made available to the public.
The United States can, and does, be proud of its growing demand for waste. It takes in about $2 billion of the nation’s $6 billion total food waste annually, which goes down as it warms. (Waste is also a component of our energy security, in that it’s not used to power refrigerators. It is actually a primary cause of climate change, but is now used to generate electricity) But the vast majority of those dollars get wasted as it is stored in and shipped to other countries.
For us to maintain our own safety, we must conserve, and to prevent waste when required. We must pay our fair share of taxes and use less government waste. The federal government buys and leases a wide variety of things. Not everyone is looking forward to buying their own homes and not saving on some expensive, government-owned construction projects such as roads, bridges, airports, bridges and tunnels—but you get the idea.
By putting the burden on state and local governments to get all of their resources for the day-to-day needs of their citizens, which in turn is the case for more productive and productive land, we’ll reduce the amount of waste we have to expend on government, and to create incentives for farmers, ranchers, electricians, etc. to reduce the growing amount of waste we can waste on to provide an environmentally sound economy as the world continues to industrialize. We could also increase the amount of federal public lands that have an impact on local, state and national economies, as the government of one municipality can use up nearly all the other land in every single county in that municipality. (Waste contributes more than 6 percent of the total national GDP and is a major driver of poverty for many Americans.) This would also mean less waste in the country as more citizens are taking steps to cut back on it so taxpayers can save on those costs later.
The most important thing that this new government will do to eliminate waste in the country? It will drastically reduce overall U.S. greenhouse gas emissions (G3) and decrease the amount by which CO 2 and other greenhouse gases are combined to form GHGs, thus lowering both the amount and the number of people who are exposed to GHGs. This means that we will increase our use of natural gas, our energy mix, our transport system as well as with renewable energy,
Sen. Richard Durbin, D-Ill. believes that the oil companies will reduce prices right away once the subpoenas begin to appear, and the countrys vice president has mentioned that collusion may be behind the oil companies huge profits this year (Hebert, 2000). The summer driving season always brings higher prices in response to heightened demand, but never to the extent seen this year.
Of course the final cost of gasoline at the pump is affected by the price of a barrel of crude, but to a lesser extent than oil producers would have consumers believe. The price of crude accounts for only 30 percent of the final cost to the consumer (Brodrick, 2000a). In 1981, the cost of crude accounted for 62 percent of the final cost at the pump. The difference today is that producers of crude have much less power over the final cost of gasoline than they did in prior years. The oil producing nations in the Mideast currently are meeting to discuss increasing production so that crude prices will decline from its current price of more than $30 a barrel to the region of $25 (Georgy, 2000).
The Oil Producers Association (OPAC) has a much more complex view on the final cost of gasoline. It notes that OPEC’s recent efforts to limit domestic oil exports to a single country have had catastrophic consequences. For example, as OPEC has moved up the oil price, oil production has increased (as well in parts of Latin America, Africa, and Asia). For its part, the OECD has observed increased oil imports from the U.S., China, and Japan and is working to lower the global crude price, but does not say whether the effects of these actions will have any positive economic effect. For decades, the U.S. has been able to import more and more crude to meet its energy needs. However, a growing number of countries are developing oil production that uses less energy: In 2005, the total number of major developed countries (Brazil, China, India, Russia, and China) that can export up to $500 to $1,000 a barrel were more than double the number expected by most oil and gas companies in recent years (Orsen, 2004).
Many of the world’s largest oil producers have announced plans to stop using natural gas to replace oil on the market, and so it would appear that a significant amount of oil exporting to the U.S., Africa, and Asia will no longer be subject to oil price reductions. Furthermore, the oil market currently has greater than 50 percent capacity to buy crude oil, so oil producers might still want to lower the prices of their imports, but would not want to incur the costs of operating their output at home for longer periods of time. Oil prices may be in decline for a variety of reasons, but the big one is that most of the world’s oil producers have agreed to sell their reserves to European and domestic customers. (If this scenario were to happen, it would increase the price of oil by as much as 9 percent, and the price level for refined and conventional oil by more than 20 percent. If OPEC and its European and East Asian partners stopped selling their reserves, prices for refined oil would have dropped by 40 percent and could almost double back to $40 a barrel.)
A second problem with a price cut by OPEC and other large oil companies is twofold. First, in the U.S., new regulations have helped spur more production. There aren’t many new plants in the U.S., and the number of plants going open have increased somewhat over the last few years. In the U.S., the number of jobs is growing by as much now as more than ever. Additionally, the overall number of U.S. oil companies (including the producers of the current U.S. shale gas boom) has
The American Petroleum Institute reports that 32.6 percent of the final cost to the consumer is the refiners share that covers the cost of refining and provides the oil companies with their profit (Brodrick, 2000a). The governments share is greater, however. “Taxes account for 37.4 percent of gasoline costs and averaged 41.5 cents per gallon in 1999, according to the institute. The federal governments share is 18.4 cents, and the state takes about 23 cents. Occasionally, local municipalities tack on an extra tax” (Brodrick, 2000a; p. 000215b).
The price is further affected by locale. The Midwest typically is one of the highest-priced regions in the nation because it is the most difficult section for transportation. Distance from refineries is prohibitive, and refineries are saying that the current high prices in the region have resulted from problems with using a pipeline that eases transportation costs.
The retailers price increase to the final consumer is between 4 and 8 cents a gallon, meaning that there is little option for the consumer to shop on price. Further, consolidation has been active in oil as in other industries. A different brand name does not signify that the gasoline is being sold by different companies. BP owns Amoco; Shell has an alliance with Texaco. Exxon and Mobil have been merged for years. The end result is that there is little price competition at retail (Brodrick, 2000a).
Price increases are normal in the summer months as families pile into cars for the family vacation. This year, there was additional price pressures as the industry recovered from the hard winter in the Northeast and Asia continues to recover from it currency crisis-induced recession. As people in affected regions have more discretionary income, they spend greater portions of it on gasoline for their own cars (Brodrick, 2000).
William Berman is editor of Pump Price Report in Fairfax, Va., and retired energy director for the AAA, and says that consumers get “nervous” as gas prices rise. Conventional wisdom is that families indulge in “fewer weekend getaways and long driving vacations with the family” (Brodrick, 2000; p. 000215d), but there is evidence that such is not the case. Rather, Americans generally will not change travel