Everyone's Gasoline Problem

Submitted By zkeatley71
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Pages: 4

Business Economics GM545
Winter 2012 - Session A

Everyone’s Gasoline Problem
Americans drive three trillion miles a year, equal to 820 trips between Pluto and the sun. The United States uses 178 million gallons of gasoline a day (How does OPEC influence gas prices?, 2012). For most of us, this has an enormous impact on our family’s weekly budget. So why does this happen and who’s to blame? This topic has several factors that can greatly affect the supply and demand of gasoline at your local gas station.
For starters, gasoline is a byproduct of crude oil and the majority of crude oil is produced and sold by Organization of the Petroleum Exporting Countries or OPEC. OPEC consists of twelve countries that include Africa, the Middle East and South America. OPEC states on their website that their mission is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry (www.OPEC.org, 2012) It can be argued as a good or bad thing that they control the flow of crude in order to maintain a price point for all of their producers. This is source number one that will impact the cost of gasoline.
From that point the crude oil is moved to a refinery where it undergoes the process of transforming it into other usable products such as gasoline. However, not all crude oil is created equal and some are going to be more cost effective to produce a higher quality product. There are 144 refineries operating in the United States today however, the last new refinery built in the U.S. was back in 1976. While most of these refineries have undergone improvements to increase output over the years, the U.S. still finds itself coming up short especially during times of high demand. This is source number two that will impact the cost of gasoline.
Combine these two on any given day with any one of the other factors that impact our price such as worldwide demand from other developing countries, a natural disaster, a war, or the falling U.S. dollar and the result will push up the price of a gallon of gas. Just the idea that OPEC will reduce the number of barrels of crude to the U.S. will give justification of the refineries to jack up prices in order to protect themselves but it typically takes a little longer for prices to fall back.

Chapter 8, Question 11
A purely competitive market exists when the following conditions occur:
Low entry and exit barriers - there are no restraints on firms entering or exiting the market
Homogeneity of products - buyers can purchase the good from any seller and receive the same good
Perfect knowledge about product quality, price, and cost
No single buyer or seller is large enough to influence the market price (Microeconomics - Perfectly Competitive Markets , 2012)
I absolutely believe that the internet has shaped our markets and given consumers the ability to seek out information on products, companies, and pricing however, I don’t believe that it has impacted all markets in this way and consumers cannot control the demand and availability of products
I mention this because my experiences and time spent finding the best price for a given product have often led me to find that the product with the best price was either unavailable or the company offering the product charged ridiculous fees for shipping and handling in order to make up the difference in their low price.
Personal computers are a good