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The Concepts Of Supply And Demand

1365 words - 5 pages

Gasoline prices are influenced by a multitude of factors. Crude oil prices, the major component of gasoline, are higher. World oil supply is tight due to record growth in world oil demand. With gasoline demand at record levels, U.S. refineries have responded by producing record amounts of gasoline. Most refineries are running at a 96% utilization rate, far exceeding the general industry average of about 82% (Hackworth & Shore, 2004). There has been no net increase in U.S. refining capacity for the past three years, and the last new U.S. refinery was built in 1976 (Parker, 2004). Currently, there are 149 U.S. refineries, a roughly 50 percent decrease from 1980 of more than 300 refineries (Parker, 2004). It is increasingly difficult to build new facilities to increase production due to economic, environmental and political considerations, environmental requirements, rates of return on investment, and the social opposition factor. The biggest factors of all are supply and demand. This paper examines an article on how refineries have impacted the economic reasoning behind the change in supply, demand, and price of gasoline.Insufficient SupplyThe Law of Supply states that the quantity supplied rises as price rises and the quantity supplied falls as price falls. When the price of a good rises, inividuals and firms can rearrange their activities in order to supply more of that good to the market (Colander, 2004). Unfortunately, this is not always the case since there might not be room for more supply."With the United States consuming record amounts of gasoline, there's never been a more dire need to build new oil refineries," (Parker, 2004, p. 2). Nonetheless, refinery closures have occurred every year over the past two decades. Domestically, the U.S. refineries are producing at capacity and have no more room for an increase in supply. Since 1988 the United States has lost over 1.6 million barrels per day of capacity, which is about 10 percent of today's capacity. Several factors are driving this situation:* The refineries that have closed were less efficient and could not generate a reasonable profit to continue operations.* Meeting environmental regulations is costly (Hackworth & Shore, 2004) and changing environmental regulations have had a direct impact on product yield and ultimately supply.Although it's obvious more refineries are needed in order to increase supply, overall public distaste for refineries makes it nearly impossible for oil companies to build more. In addition to this opposition, consumers and environmentalists are also fighting the idea of new refineries. "They're considered eyesores, so no one wants one in the neighborhood," (Parker, 2004).Higher DemandThe Law of Demand states that the quantity demanded rises as price falls and the quantity demanded falls as price rises, other things constant. As prices change, people change how much of a particular good they're willing to buy. Because people make their buying decisions...

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