The Economic Factors Involved With The Rising Price Of Gasoline

3072 words - 12 pages

The Economic Factors Involved with the Rising Price of Gasoline

The year 2004 has seen a steady climb in the price of gasoline. From
January of 2004 to May of 2004 there has been a jump of approximately
.50 cents a gallon (Energy Information Administration). For many
Americans high gas prices have been a hot issue with them, and there
seems to be no rhyme or reason to these fluctuations. With the
continued popularity of the sport-utility vehicle and the high volume
of gasoline it requires, the issue of high gas prices doesn’t seem to
be going away anytime soon. Many factors go into determining the price
of gasoline. This paper will explore the various factors involved to
determine the price of gas and attempt to gain a better understanding
on how it arrives at its decision.

The gasoline industry is an oligopoly. In Mark Hirschey’s book called
Fundamentals of Managerial Economics an oligopoly is defined as, “A
market structure characterized by few sellers and interdependent
price/ output decisions”. This market structure only allows a few
large rivals to produce the majority of the industry’s output (404).
The oligopoly controlling the gasoline industry is the Organization of
the Petroleum Exporting Countries (OPEC). OPEC consists of 11 oil
producing countries: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela,
Qatar, Libya, United Arab Emirates, Algeria, and Nigeria (OPEC.org).
These countries control gas prices by the amount of crude oil they
produce. To gain a better understanding of how the United States gets
its gasoline and who supplies it, we will have to take a closer look
at the degree of competition.

Because of the nature of an oligopoly there is very little
competition. The OPEC countries account for nearly 50% of the United
States crude oil imports. The top three oil producing countries in
thousand barrels per day are: Venezuela (1,372), Saudi Arabia (1,161),
and Nigeria (1,044).According to OPEC’s website, WWW.OPEC.org, their
principle aim is the, “Co-ordination and unification of petroleum
policies of Member Countries and the determination of the best means
for safeguarding their interests, individually and collectively. The
Organization also seeks to devise ways and means of ensuring the
stabilization of prices in international oil markets with a view to
eliminating harmful and unnecessary fluctuations, due regard being
given at all times to the interests of the producing nations and to
the necessity of securing a steady income for them; an efficient,
economic and regular supply of petroleum to consuming nations; and a
fair return on their capital to those investing in the petroleum
industry.”

The remaining 50% of imported crude oil comes from non OPEC
countries. Of these countries the top three producers are: Canada
(1,569), Mexico (1,565), and Angola...

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