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How the Economy affects Gas Prices Any type of economy has certain rules it plays by. These rules are the government activity in the countrys economy, the countrys infrastructure (including roads, railways, telecommunication lines, and oil / gas pipes), the economic type of system and the mentality of people. In most modern economies, the infrastructure usually is maintained by the government at the national and local levels while in the most advanced economies we are talking about the market system is maintained and encouraged. The mentality of the most people of the developed nations is to make money and to act reasonably and rationally in order to create more wealth for themselves and the whole economy.
The capitalist market economy believes that the best price that can be is the one determined on the market by the supply and the demand for the certain type of good. In the following essay I am going to speak about how the economy in the USA affects gas prices. Unlike in Iraq or most of the Arab countries where the king or emir determines the price of the base product from which gas is made, oil and ultimately gas, in the USA gas price is primarily determined by the capitalistic rules of the economy. In other words, if there is little of oil to make gas from, than it is more likely that the companies will charge more for the limited amount of good they have in order to reasonably increase their profits. If there is an abundance of oil than the gas prices are likely to be lower because the companies would have a hard time to sell much oil to the limited number of buyers. Here one should be not surprised to hear that the oil extracting, refining, and gas companies are glad to encourage high reliance of the whole economy on gas and oil to assure stable and growing demand.
The alternative fuels that also influence the gas prices for competing with gas, like methane, kerosene, etc. (the so called substitute goods) are virtually non-existent in the USA, thus one should only be aware of its existence without considering it at present as a powerful price determinant (Daniels, 234). The second gas price determinant of the USA economy are the expenses associated with the gas production. If in arab world, the oil extraction is rather easy process, than in the USA, let alone the absence of abundant supply, the oil is either located deep below the ground (thus increase the costs of its extraction and ultimately the cost of gas) or in the frozen territories of Alaska and North Pole (that increases costs associated with the crew maintenance, delivery of food, warm clothes to name but a few). The labor engaged in oil extraction is also the potent price determinant of any product produced from oil (including gas) in the future (Mattingly, 65). With the US wages being the highest in the world, the cost of extraction has to be adjusted appropriately. Here I would like to note the role of the US government in the economy that in turn influences the oil and therefore gas prices.
The US government strives to reduce the oil prices as much as possible to make the oil and gas dependent economy going smoothly. Oftentimes, the US government sets a fixed gas price for a company to sell in a given area, where the supply of gas or the competition is limited. Thus in States like Montana, Wyoming, South and North Dakota where the number of oil producing and gas companies is limited to 2 or three, the prices are set regulated (Daniels, 230). This impact is certainly felt by the companies who intern driven by the market economic forces of maximizing profits set a price somewhat higher in other states where the government does not interfere. The powerful lobby groups at present assume even a more important role than in the past. The third price determinant is related expectations of the stock market regarding the future supply of oil.
Expectations is a rather vague yet potent price determinant that is oftentimes used for price manipulative and speculative purposes on the stock or mercantile exchange. Thus, with the US entering the war in Iraq and being unable to immediately capture the oil well of Saddam, the oil prices on the mercantile exchange rose in expectations that the oil delivery to the states can be hindered by the war in the Persian Gulf. Consequently the stock prices of the oil producing companies is negatively correlated with the oil prices, meaning that once the oil prices went up because on the expectations of the future oil deliver stoppage, the stock of companies like Shell, Gas Prom or British Petroleum are more likely to face a brief nosedive. The retail gas is more likely to follow the stock market and oil futures prices yet with some time gap, which is usually 2 - 3 months (Stephenson, 17). The fourth and the last price determinant that is going to be mentioned here is the demand and supply for the gas consuming vehicles, or tools. If the demand for Ford cars doubles up within the next 6 months, one can assume that these vehicles would demand twice as much oil as previously was demanded by the auto market.
And if the supply of the oil is constant, than the gas price is going to increase. The last price but not least price determinant in the economy is the gas price in the neighboring countries, or the so called arbitrage opportunity (Perkman, 34). Thus, if the US companies managed to decrease its labor, production and extraction, refining, and delivery costs to the absolute minimum of say $ 1 per gallon with the retail nation wide gas price averaging $ 1. 3 per gallon, the costs of gasoline in Britain, Germany, or any other European or large Asian country can severely disrupt it. Thus, if the European gas of the same quality is sold at $ 2 or $ 3 per gallon, than the efficient US gas companies might want to stop being the good guys who sell gas cheap and ship and sell the gas in Europe and Asia. The domestic supply therefore will be reduced intentionally and the price will readjust to reach some intermediate point between the foreign price and the previous domestic US gas price. Apparently the foreign gas market size matters, because if some country like Poland has a gas price of $ 5 per gallon with the whole gas market being only a fraction of the US gas market no single company would ship gas there.
In conclusion I would like to say that the economy influences the gas prices tremendously, while itself being influenced by the technological breakthroughs, government regulations, and the neighboring competing economies. As it has been mentioned previously, the gas prices although originally is determined by the expenses associated with the production of gas and the supply and demand for gas interaction, can be influence by other factors. Thus, the supply and demand interaction for goods that demand gas, or the supply and demand of substitute goods can impact the gas price in the economy. The expectations theory and the global village economy have also great impact on the gas prices, making the whole gas price setting process in the Economy a rather intricate and uncertain endeavor.
Bibliography: Stephenson, Peter, The role of market economy in gas price determination, Oxford University Press, 2002. Daniels, Alfred, The US oil companies, Penguin Books, 2001. Perkman, Katherine, The economic simulation models, McGraw Hill, 2001. Mattingly, Gregory, The global village, Berlin Press, 2002.
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Research essay sample on How The Economy Affects Gas Prices
