Nancy the prices for their products and

Nancy the prices for their products and

Nancy Clayton Microeconomics: week 4 September 22, 2011 Effects of Supply and Demand on the Price of Oil Each time you pull up to the pump or open your utility bill, you may notice the price of fuel may have changed. There are many factors that can influence fuel prices. The marketplace forces of supply and demand determine the price of fuel.

If demand grows or if a disruption in supply occurs, there will be upward pressure on prices. By the same token, if demand falls or there is an oversupply of product in the market, there will be downward pressure on prices.Those principles apply at the service station level as well. If a retailer prices its gasoline too high, and without regard to competition, the retailer’s customers may take their business to another station with lower prices. If a retailer loses enough volume, the retailer may then reduce prices in order to retain its customers.

Competition among retail outlets thus affects pricing. You may notice that sometimes there are price differences between two gasoline stations on a busy street corner and between those outlets and the only station on a long stretch of highway.More choices generally mean more competition for business. And although retail outlets may sell gasoline carrying the brand of a major oil company, most dealerships are owned and operated by independent business people who are free to set the prices for their products and services. Like agricultural products, such as wheat and corn, and precious metals, such as silver and gold, crude oil is traded on the world market. Recently, crude oil prices have risen dramatically, driven by rising global demand and political instability in several oil producing countries.Crude oil prices are important in determining gasoline prices because crude is the primary raw material used to produce gasoline and other petroleum products.

In some cases, the price of crude oil may account for up to half the price of a gallon of gasoline. While crude oil is traded in a global market, gasoline is part of a regional market. Transitions in supply can also affect the short-term availability of gasoline. Going into the peak summer driving season, refineries are adjusting their gasoline formulas to help protect the air quality in warmer weather.And, because of changes to federal energy legislation passed in 2007, many states are switching to ethanol-blended gasoline.

The price of heating oil is determined by supply, demand and other competitive factors, and is affected by the price of crude oil, refining costs and distribution and marketing costs. Just like gasoline and natural gas, the price of heating oil is ultimately set by the marketplace. Competition in areas with multiple suppliers or dealers may impact prices. Households located in remote locations may pay higher prices. In any market situation, supply and demand imbalances can affect prices in both the short and long term.

If the supply is disrupted, as it was after Hurricanes Katrina and Rita in 2005, short term demand for the product may exceed the supply on hand and put upward pressure on prices. Consumers all over the country, even those outside of the Gulf of Mexico region most directly affected by the hurricanes, observed a rise in prices at the pump. The basic reason was the imbalance between supply and demand.

Gasoline, including gasoline blending components, moves from region to region. When crude oil and gasoline production were shut in following Hurricanes Katrina and Rita, the country’s gasoline supplies were reduced approximately 10 percent.Gasoline supplies were moved to the Southeast from other parts of the country, affecting supply in those areas.

That put upward pressure on prices, as supply was affected but demand remained high. In conclusion, the writer George Bernard Shaw once said that, to obtain an economist, it was only necessary to teach a parrot to repeat endlessly the phrase “supply and demand. ” Well, I have to agree with the parrot.

For the most part, high oil prices reflect high and growing demand for oil and limited (and uncertain) supplies. References Gramlich, Edward M. (2004). Oil Shocks and Monetary Policy,” speech delivered at the Annual Economic Luncheon, Federal Reserve Bank of Kansas City, September 16 Weiner, Robert J. (2002). “Sheep in Wolves’ Clothing? Speculators and Price Volatility in Petroleum Futures,” Quarterly Review of Economics and Finance, vol. 42, no.

2, pp. 391-400. Bernanke, Ben S. “Oil and the Economy. ” Speech presented at Darton College, Albany, Ga. Oct. 21, 2004.

See www. federalreserve. gov/boarddocs U. S. Energy Information Administration. “Short-Term Energy Outlook. ” 2004c.

See www. eia. doe. gov/emeu/steo/pub/outlook. html.