Title : Gasoline Description : 7page paper for Economics The price of gasoline is a major interest to almost everyone in the country and almost everywhere in the world. It seems that every month or even more frequently, gas prices are either rising or dropping but never staying stable. Gasoline prices are affected by many factors, including the price of crude oil in the world market, supply and demand for gasoline, local market competition, temporary supply interruptions, government regulations, or taxes. Gasoline is produced by a distillation process where crude oil is heated and fumes are captured and converted into many products such as kerosene, jet fuel, and gasoline to name a few. Therefore the price of crude oil, which is extracted from oil wells beneath the earth’s surface, is a major factor in gas prices. The five leading oil producing countries and their approximate shares of the world supply of oil are: Soviet Union 21%, Saudi Arabia 17%, The United States 15%, Venezuela 4%, and Mexico 4%. These five countries made up 61% of the worlds oil production back in 1980. Even though the United States is a major producer of oil, it does not make them self-sufficient. The United States uses more oil than they can produce and must look toward foreign countries. Therefore, the United States is forced to deal with an organization called O.P.E.C. The reason the United States goes through O.P.E.C., is not only in its own interests, but also in the interests of its allies and in the interest of maintaining world peace. O.P.E.C. which stands for Organization of Petroleum Exporting Countries, is made up of 13 countries: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador, and Gabon. It controls approximately four fifths of the worlds oil reserves in the non-Communist world. O.P.E.C. was founded in Baghdad, Iraq in September of 1960. The headquarters were initially set in Geneva, but were later moved to Vienna in 1965. O.P.E.C. was organized in response to oil producing countries that did not consult with the Middle Eastern oil states before lowering their crude oil prices. The producers feared that other countries would establish monopolies. The aim of O.P.E.C. was to create a universal price between the countries, in order to ensure peace between oil producers throughout the world. O.P.E.C. also wanted to provide its members with technical and economic support in times of need, since not all the countries were completely stable. Even though the goal of O.P.E.C. was to establish firmly unified prices among their members, the organization was not always successful. In their quest for control over the world market of oil production, they have run into several obstacles and setbacks. O.P.E.C. has barely survived due to internal conflicts among its members. Since O.P.E.C. almost has a complete hold on the worlds oil supply, the United States is extremely concerned with the areas instability. The Middle East and the Persian Gulf area, where most of the members are located, are extremely prone to wars, both civil and cross borders. They are often plagued by religious battles and positions of power are frequently overthrown, making it hard for any stability to come out of the area. Anytime
there is chaos in the Middle East, the United States thinks back on "... memories of other troubles in the Persian Gulf area: the Arab oil embargo in 197374, the Iranian revolution in 197980 and Saddam Hussein’s invasion of Kuwait in 1990" (Hancock 53). The area is also vital to our allies, who would be crippled without Gulf oil, whose livelihood we are dependent on. In 1973, O.P.E.C. raised oil prices 70%. "The dominant Middle Eastern members of O.P.E.C. used succeeding price increases as a political weapon. They aimed it at Western nations in retaliation for their support of Israel against its Arab neighbors in the so-called Yom Kippur War of October 1973. They accordingly raised prices another 130% at the Tehran Conference of December 1973, and a temporary embargo was placed on the United States and the Netherlands simultaneously. "Other price increases followed in 1975, 1977, 1979, and 1980, which ultimately raised the price of a barrel of crude oil in The United States from $3.00 in 1973 to $30.00 in 1980" (Glasner 107). Almost every college student has heard stories from friends or relatives about the gas crunch in the 1970’s. People waited in lines that stretched for miles, and could only get gas on certain days depending on the first letter of your last name. O.P.E.C. used the money they raised to invest in other countries, placed in foreign banks, currency markets, and to help their own economies through inner development. O.P.E.C. is also extremely interested in maximizing profits, but in such a cartel, finding a price that will maximize profits is impossible. O.P.E.C. has attempted to raise prices several times by cutting production. According to economic theory, a decrease in supply will yield higher prices. These are some of the reasons the United States must offer stability and continue to have troops in the area. They must intervene when the worlds oil and its prices are in jeopardy. Currently crude oil prices are rising due to the bombings in Saudi Arabia. "It has continued to soar, to more than $24 a barrel, up 34% from one year ago, the highest level since the 1991 Persian Gulf War" (Borenstein 49). O.P.E.C. has contributed this increase to several factors: first, the rising demand of crude oil throughout the world. Second, the tight inventories because of the belief that supplies are going to run low. Third, the current turmoil that exists in the area and fourth, the heating demands of the abnormally cold winter. These factors have already raised the prices of diesel fuel, jet fuel, and home heating oil. This is of major concern to truckers, airlines, and home heating oil companies. Because of these price increases, airline ticket prices will also increase. These are just a few of the elements that affect prices, but none of them have enough power to greatly change the prices that exist at the pumps. The demand of crude oil is always cyclical. The United States demands more gasoline in spring and summer months than in the fall or winter, due to people driving more. The current trend in vehicles has moved to larger sport utility vehicles from small economy cars of the past. These large sport utility vehicles consumes more gas and gets fewer miles per gallon. The country is constantly searching for new and more efficient forms of energy. More importantly the country is searching for means of energy that will not make Americans poorer. Another interruption of the U.S. production of oil came during the spring of 1990 when Iraq accused Kuwait and the United Arab Emirates of limiting oil production. This severely depressed world oil prices and
cost Iraq billions of dollars in annual revenue. On August 2, 1990, the president of Iraq, Saddam Hussein, invaded and occupied the small Arab state of Kuwait. Hussein set afire 730 of Kuwait’s oil wells that spilled giant pools of oil and killed all surrounding animal life. Even though Hussein burned and spilled Kuwait’s oil, it did not directly affect the price of gasoline in the U.S. This little crisis, which is known as the Gulf War, cost Iraq countries buying their oil and wasted a valuable natural resource that could someday be gone from the earth. Recently, Saddam Hussein has threatened fuel resources again. Hussein does not approve of the United Nations investigating his private palaces for chemical warfare weapons, so he has made it even harder to buy fuel from Iraq. Supposedly he has landmines around the oil wells so no one can go near them. Several interruptions in the United States production of oil have staggered the country's production. The United States is the only major oil producing country where the land owner has owned oil producing grounds and not property of the government. This makes for inefficient drilling since one party is not completely responsible for gathering all the oil. Average productions per well are only 15 barrels per day, far less than any other oil producing countries. Alaska has the best oil producing land, but due to the land and harsh climate, it makes it hard to gather. Developing methods of transportation which slows gathering of the oil is also very expensive. "Several refineries; on the West Coast, in the East and on the Gulf Coast, have experienced operational difficulties which affected product supplies in the marketplace" (Goulder 187) It is rumored that there are supply tanks buried somewhere near the Gulf of Mexico that could support the country for 66 days if anything were to happen. The United States and other countries have been looking into alternative forms of energy to lower their dependency toward foreign oil. Money is being spent into researching solar, hydro, nuclear, and alternate forms of energy. Government regulations also create changes in gas prices. California has recently gone through price increases at the pumps due to new legislation. The state is heavily overpopulated and has the worst smog of all the states. California gas stations are changing to a cleaner gas that will cause less air pollution, but will be more expensive. The increase is approximately 1012 cents. That is the price Californians are going to have to pay for cleaner air. This is another government regulation which they aim toward the refiners of the oil. The government is putting pressure to change from their winter grades which they oxygenate, to summer grades that have lower evaporability, helping the environment. The cost to switch fuels shows up at the pumps and the public has to pay for governmental research and environmental precautions. Even with the increase in prices, the United States doesn’t have it as bad as other countries. The U.S. pays an average of $1.21 per gallon of gasoline. Japan pays $5.35 per gallon, Germany pays $4.04 per gallon, The United Kingdom pays $3.38 per gallon and Mexico pays $1.55 per gallon. All four are greater than what the United States pays. Taxes are the largest component of the prices we pay at the pumps. "Taxes were the single largest component cost of gasoline, amounting to 42.4 cents per gallon, including 18.4 cents per gallon in federal taxes, 22 cents per gallon in weighted average state taxes and an estimated two cents per gallon in local taxes" (Goulder 49). The President of The United States of America,
Bill Clinton, has on several occasions proposed to increase the taxes put on gas. In 1993 Clinton proposed a gas tax that raised the prices at the pumps by 7.5 cents per gallon, a 6% increase of the price. Then in 1996, Bill Clinton proposed to raise gas taxes by an additional 2.5%. Clinton wanted to raise prices 10 cents per gallon overall in his four years in office, all part of his "deficit reduction plan." Clinton’s entire campaign was based around not hurting the American people with taxes, but once in the White House, he has made the record books with the highest amount of gasoline taxes ever. Taxes are so much a part of the prices we pay that "¼in 1981 when pump prices where at an all time high of $2.27 per gallon, the taxes were just 27.7 cents per gallon. The real cost of motor gasoline to consumers fell by a dollar per gallon between 1981 and 1995, but over the same period federal, state and local motor gasoline taxes increased by nearly 15 cents per gallon" (Chandler 1). Taxes in the United states have increased an average of 15.6% in the last three years. Many factors influence the prices of gasoline. The price of crude oil affects gasoline prices in the world market, supply and demand for gasoline, local market competition, temporary supply interruptions, government regulations, or taxes. Every day new things can happen to change the prices that American consumers pay at the pumps. The United States is dependent on foreign oil and must continue to ensure stability in the Middle East, or until we have found alternate sources of energy. Taxes will continue to climb due to the rise of government control. Regulations will continue to become stricter until gasoline usage is more environmentally friendly. It looks as if gas prices will continue to fluctuate, but over time will rise.