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Everyone's Gasoline Problem

Essay by   •  March 20, 2011  •  Term Paper  •  1,140 Words (5 Pages)  •  1,972 Views

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Gas prices go up and down due to many different factors. Among them, seasonality and local competition deserve closer attention. The first reason has a lot to do with supply and demand. It is known that people drive more during Summer time, so the demand for fuel increases (1). Aware of that, the industry deliberately raises gas prices to earn a greater (and faster) profit, even when crude oil prices remain stable. It is as simple as 1-2-3: if the weather is nice, consumers will drive more and consequently will need more gas. With the high demand, the final gas prices at the pump increase.

It remains unclear to me if raising prices "just because" is an ethical procedure, especially when there's no shortage. I have a tendency to say, however, that the industry usually takes an unfair advantage of the context --again, I am referring to a scenario where shortage is not a reality. Just as an example, the prices of a given video game sold at Best Buy will only increase if the demand gets to an unsustainable point, with people literally fighting for the item. If the game is only "selling more" because it's vacation time and kids want to buy it more than ever, then the prices will probably remain the same. Why it has to be different when it comes to gas?

Local retail station competition also plays a considerable role in the fluctuation of gas prices. It is common to see many station in the same neighborhood practicing equivalent prices. This occurs because, since the item of interest (fuel) is supposed to be the same (there's no great variation in quality, for example), price is the most important element to attract consumers. If I were a Shell gas station owner charging $4.00 for a gallon of gas, all my clients would migrant to my nearest competitor, and my business would not survive. This reality leads me to think that if a given station finds a way to charge $2.00 per gallon, then all local competitors would have to reduce their prices as well.

Another important reason for gas prices variation is the cost of crude oil, which is, in most cases, driven by supply and demand as well. The Organization of Petroleum Exporting Countries (OPEC) has a significant power over that context, especially because the countries that team up with the organization control most of the oil in the world. Although OPEC "tries" to keep the barrel at a "reasonable" price, the entity immediately foments increases when the big producers get involved in an unusual situation that may impact the extraction and refining of petroleum. Wars, political and religious conflicts, embargoes, and many other factors may force the oil price to go up. As a result, consumers will obviously pay more at the pump.

"Rapid gasoline price increases have occurred in response to crude oil shortages caused by, for example, the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf conflict in 1990. Gasoline price increases in recent years have been due in part to OPEC crude oil production cuts, turmoil in key oil producing countries, and problems with petroleum infrastructure (e.g., refineries and pipelines) within the United States. Additionally, increased demand for gasoline and other petroleum products in the United States

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