Title : Gasoline
Description : 7page paper for Economics
Body of Essay :
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 earths surface, is a major factor in gas prices.

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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 Husseins 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 1970s. 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 Kuwaits oil wells that spilled giant pools of oil and killed all
surrounding animal life. Even though Hussein burned and spilled Kuwaits 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 doesnt 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." Clintons 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 "in 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.


Category: Business