Increase in Gasoline Price in February 2013 in the USA

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The US had experienced a massive rise in gasoline price during the month of February this year. From macroeconomics perspective, there are limited resources that human beings use carefully to satisfy their endless needs.

The price of gasoline, a by-product of oil, highly depends on the price at which oil is acquired from the producers like the Organization of Petroleum Exporting Countries (OPEC), the distribution cost, taxes, currency devaluation and the refining cost.

Currently, the price of oil is also influenced by the worldwide demands and supply of oil and the Iranian sanctions. During the month of February, gasoline price rose; a trend that can be attributed to the above factors, which are going to be analyzed in depth.

Devaluation as a possible factor means the reduction in value of a currency like the US dollar with respect to other monetary units (Currencies: What devaluation actually means, 2013). Clearly, a country that experiences devaluation will have to use more of their funds to acquire services and goods in comparison to other countries.

The immense pressure on the US dollar for over six years had lowered its value by close to 40% (Why Are Gas Prices So High?, 2013). The US dollar, as one of the major currencies of trade is highly prone to market changes. The US citizens, therefore, had to spend a lot of money at the barrels due to the decline in value of their currency.

Additionally, the demand for crude oil in the US and the whole world had been on the rise hence causing the rise in the price of gasoline. The number of consumers in the market at any given time will affect the quantity of product demanded.

For instance, if there are a few customers in the market, the demand curve will shift downwards, indicating a decrease in the quantity demanded at that time (Scarcity, choice and opportunity cost, n.d.). However, when there are many customers in the market the demand curve will move up, indicating an increase in the quantity demanded. The movement in the demand curve alters the price of a product.

From the graph, a decrease in the quantity supplied will shift the supply curve upwards thereby raising the equilibrium price of a product. This is a sign for high shortage of the product. Therefore, the continued demand for gasoline in the US amid the decrease in supply can be viewed graphically as resulting to an increase in the price of gasoline (Factors Affecting Supply & Demand, 2009).

Other factors that can be analyzed from the graph are government taxes that are met by the final consumers. For instance, in 2012, there was consumption of 89.2 million barrels per day (bpd) in the US. This usage was projected to rise in the subsequent years. Markedly, the United States is the largest importer and consumer of crude oil. In 2009, it imported over 5.92 million bpd.

Evidently, a high demand for a product will result to increase in its price if the market is not able to supply enough quantity to cater for the increasing demand (Why Are Gas Prices So High?, 2013). Therefore, in February the US demand for oil remained high amid supplies that could not satisfy the continuous demand. In line with this is the inadequate local supply of oil from the oil companies.

During this time, some of the US oil firms had closed in preparation for the summer. These refinery companies were carrying out equipment maintenance and normal operations. This situation lowered the supply volume of oil products into the US market.

Economically, a decrease in supply results to an increase in the price of a product even if the demand remains the same. In US, there was a reduction in supply combined with an increase in the demand for gasoline among drivers. As a result, the price for gasoline had to rise in response to changes in demand and supply.

In addition, a strict government policy in 2010 that restricted drilling of oil wells at the Gulf of Mexico saw a decline in the volume of oil supplied amid an increase in quantity demanded. The federal government played a role in the rise of gasoline’s price when they refused to permit the drilling of domestic oil.

This approach by the federal government can be seen as a method of fixing prices of certain products through the price system theory. Obviously, an attempt by the federal government to permit the drilling of oil wells at the Mexican Gulf could have contributed to the reduction of the oil price.

Moreover, the use of quota restrictions among the OPEC members on oil production also led to the high price of gasoline. In 2012, the United States received over 23% of oil products from the OPEC countries. Notably, these countries agreed to produce a given amount of oil in order to keep the price high. For example, OPEC in 2002 decided to reduce their barrel production per day by 465000 (Amadeo, 2013).

The controlled amount of production from the sources resulted to an increase in the prices of oil products in the US as the demand went up. Further, the Middle East crisis of persuading Iran to disband its development of nuclear weapons made the oil price to skyrocket.

Iran, which is a leading oil producer, experienced massive boycotts of their oil in the international market until they could comply with the UN’s requirement on nuclear weapons. The rampant Middle East unrest and revolutions caused oil shortage in the US; this occurrence kept the price of gasoline high.

A study of the opportunity cost discloses why Iran opted to look for nuclear power as an alternative for their vast oil and gas resources. This is the cost of forgoing a given product for the other. It is necessitated by scarcity of resources thus leading to giving up on a product for the best alternative.

Opportunity cost arises when there is a choice between two or more available options (Moffatt, 2000). Therefore, it forms a core part in a company’s decision-making process in analyzing the benefits and costs of choices that are made within the company or country. Iran’s decision to control their oil exports to the US and European nations shows the rationale for the high gasoline prices in February in the US.

There is also the aspect of inflation. Inflation is the continuous surge in price of products. The high price for gasoline implied that the consumption of fuel per driver and other machines that use oil products had to go down. Consequently, the businesses had to lay off some workers in order to remain viable during this crisis. Firms tend to gain competitive advantage over each other even at the tough economic times.

These economic challenges reveal a reduction in the Growth Domestic Product (GDP) of a country (Tverberg, 2013). The economy remains unstable with the high price of gasoline. Inflation, therefore, was a factor that led to high price of gasoline in the US. In addition, unemployment began ailing the entire nation. This effect on the oil prices can also cause a recession like transpiration.

The change in the US Monetary Policy forced investors to invest in non-income generating resources. Some of the resources include metals and oil; prices of these products are highly influenced by any economic alterations like inflation and devaluation of currency. Earlier, the high prices of commodities had made it difficult for investors to commit their funds in such commodities like food.

Additionally, both the federal and state governments raised the price of gasoline by levying enormous taxes on the oil products from 2009. For example, the total tax by January 2013 on a gallon of gasoline was 30.4% and 18.4% by the state and federal governments respectively. Clearly, taxation implies additional costs on the price of a product.

Moreover, there was the high refining cost. The refining companies had to transfer this cost to the consumers. By 2012, the retail price of gasoline had 8% as refinery cost. Companies like Chevron’s El Segundo refinery remained offline in February thereby leading to shortage in supply. There were also high regulatory charges that made some oil refinery companies to remain closed since 1990.

For example, the environmental regulation act required $128 billion for compliance. Tied to the refinery cost is the distribution and marketing cost that could have led to high gasoline price. The distribution channels or terminals that gasoline passes before reaching the final consumer come together with additional charges. At this stage, there is gasoline packaging, labeling, blending and branding.

All the cartels in the distribution or marketing chains have to make profit in the end. It is the final users who carry these extra charges on gasoline. In general, these businesses aim at profit maximization in order to register high liquidity. With the low purchasing power of the consumers, they will reduce their product consumption limits.

The high gasoline price remains a challenge for the entire world, and it continues to rise with time. In the US, the demand for oil is far much higher than the supply. US cannot supply oil to its residence. Outstandingly, the forces of demand and supply affect the price of any product. The Iran and Middle East crisis make distributors add risky premiums on the oil thus increasing the price of gasoline.

The stringent environmental rules have also affected the operation of some US oil refinery companies. There is need for the human population to comprehend that there are limited resources that ought to be guarded carefully in order to enhance human satisfaction at an affordable cost (Factors That Affect Pricing, 2010).

Again, there are numerous factors that can affect the value of any product; therefore, therefore, both the producers and consumers should ensure that their practices do not hinder the operations that deliver the product. The prices of various products are a factor to the global economic changes. Gasoline being a product that is consumed worldwide is highly dependent on the global economy.

References

Amadeo, K. (2013). Why Are Gas Prices So High. US Economy.

Currencies: What devaluation actually means. (2013). The Economist – World News, Politics, Economics, Business & Finance.

Factors Affecting Supply & Demand. (2009). Small Business Tool Kit. Web.

Factors That Affect Pricing. (2010). Upload & Share PowerPoint presentations and documents. Web.

Moffatt, M. (2000). What are Opportunity Costs?, Economics at About.com. Web.

Scarcity, choice and opportunity cost. (n.d.). AP US History – AP Exam Review | Adaptive Test Prep For AP Exams. Web.

Tverberg, G. (2013). High Oil Prices and GDP – Business Insider. Business Insider. Web.

Why Are Gas Prices So High?. (2013). Institute for Energy Research. Web.

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Increase in Gasoline Price in February 2013 in the USA

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