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Will the rising cost of gasoline ever stop In the context of contemporary world economy and industry, oil and gasoline trends, in particular, cumulative and regional supply and demand, prices, and transportation costs become extremely controversial issue in terms of its development, forecasting and long-term impact they have on national economies worldwide, including the US. Practically, booming economies in the US were bolstering energy demand during last to years, however the extent to which high energy costs limit economic growth or to which increased energy conservation ensue is as yet unknown. The US economy will grow in 2005, as will total energy demand, while realizing greater energy efficiencies. Oil and Gas Journal analysts forecast that US oil demand will increase more than 2 % this year, and natural gas, coal, and nuclear energy demand also will grow but by smaller margins. Therefore, from the critical point of macroeconomic view and subsequent interpretation of the demand law, cost and prices of gasoline are going to remain in the same growing dynamics, affecting the US economy. Simultaneously, estimates of worldwide oil demand continue to rise, prompting action by large crude exporters to supply the volatile market, which has seen prices surge and remain strong due to a host of factors.
US oil production, will be off from last year, increasing the need for imports, and US refineries will operate in excess of 93 % to meet gasoline and jet fuel demand this year. Specialists anticipate that industry inventories of crude will build, but product stocks will remain tight. In June 2004 members of the Organization of Petroleum Exporting Countries met in Beirut to alleviate a perceived shortage of crude oil on the market and high oil prices. The ministers agreed to raise quotas to a collective 2 S. S million b / d , up from the ceiling of 23. 5 million b / d , which had been in effect since April 1, for the members of the organization, excluding Iraq. The group also agreed to raise the output ceiling by an additional 500, 000 b / d on Aug. 1.
Practically, this decision served to legitimize the overproduction already taking place. There was an expectation that worldwide oil demand would dip, as it usually does, in the second quarter, and the market looked to be well supplied. Therefore, exporters did not take any official steps to boost output before May, although production already exceeded the output ceiling. Simultaneously fears that high energy prices would curtail global economic growth prompted OPEC to act to achieve reasonable oil prices. The organization noted that the price of oil was not being driven by market fundamentals but rather by a combination of factors outside its control. Among these factors is higher-than-expected oil demand growth, especially in the US and China.
Also, prices are believed to be propped up by a large number of speculators and fund managers in the futures market, by a security premium amid attacks aimed at disrupting supplies, by geopolitical concerns including instability in Iraq, and by tightness in the US gasoline market buoyed by stringent new product specifications. Non-OPEC crude exporters are expected to supply additional oil to the market to meet global demand. Mexico proposed to pump an extra 70, 000 b / d in the first half of this year, raising exports to 1. 95 million b / d . Russia, which has ramped up production considerably and is now considered to be the world's second largest oil exporter, has raised oil production sharply in recent years but is running into export constraints due to pipeline bottlenecks. International Energy Agency projections show that oil production in countries belonging to the Organization for Economic Cooperation and Development (OECD) will dip 100, 000 b / d to 21. 6 million b / d this year (Wolfgang, 29).
Paris-based IEA also forecasts that outside the former Soviet Union there will be only marginal changes in output by countries outside the OECD. Oil Gas Journal estimates that during the second quarter of 2005, crude oil exported by members of OPEC, excluding Iraq, averaged 28. 1 million b / d , up from an IEA estimate of 27. 9 million b / d during the first quarter, which is expected to contribute to a stock build of 2. 2 million b / d in the second quarter (Wolfgang, 31). IEA forecasts that global oil demand will average 80. 2 million b / d in the third quarter and grow to 82. 5 million b / d in the fourth quarter of year 2005. The US, India, and China are fueling much of the run-up in worldwide demand. IEA forecasts India's demand will average 2. 44 million b / d , up from 2. 33 million b / d last year and 2. 29 million b / d in 2002. IEA forecasts oil demand in the US this year will climb to an average 20. 38 million b / d , up from 20. 07 million b / d last year.
Since implementing structural reforms, China over the past 20 years has achieved annual gross domestic product growth of more than 9 %, and its share of world trade has risen to almost 6 % from less than 1 %, according to the International Monetary Fund analysis. As a result of this growth, IMF report indicates, China now rates as the sixth-largest economy and is the fourth-largest trader in the world. Further, the analysis says that the country's growth can continue to increase rapidly if the necessary structural reforms, including those in the financial and enterprise sectors, labor markets, and social safety nets, continue to be implemented (Hall, 301). From the critical point of view, cost of gasoline is directly related to market indicators of crude oil. In contemporary context, fears of a supply disruption are keeping crude prices high in a well supplied market. Speculators worry that even a small terrorist-caused disruption to oil supplies could cause major repercussions that wreak havoc with the supply chain.
For instance, the contract for oil on the New York Mercantile Exchange peaked on June 1, 2004 at $ 42. 33 /bbl for July delivery. The next day, the closing price was $ 39. 96 /bbl. In addition, the OPEC reference basket price, the average of seven selected crude's, also peaked on June 1 at $ 37. 64 /bbl, well above the organizations self-imposed price band of $ 22 - 28 /bbl. In reaction to the outcome of Opec's June 3, 2004 meeting, the near-month futures price of oil on NYMEX closed that day at $ 39. 28 /bbl, down only $ 0. 68 /bbl from the previous days trading. At that time the futures strip began to return to backwardation, the state in which a premium is placed on the prompt delivery of crude, in anticipation of larger supplies of oil coming onto the market in August and beyond. The average US wellhead price of oil was $ 31. 47 /bbl in the first quarter of year 2004 vs. $ 30. 10 /bbl for the same period last year and $ 17. 70 /bbl in the first 3 months of 2002.
Oil and Gas Journal forecasts that this years average wellhead price of crude in the US will be $ 31 /bbl, up from $ 27. S 6 /bbl last year (Sullivan, 518). High oil prices, low inventories on top of soaring demand, fears of supply disruptions, and tough product specifications caused product prices to rally throughout the last year. The Oil and Gas Journal weekly survey of US unleaded motor gasoline pump prices revealed a nationwide average of $ 1. 74 /gal in the first 8 months of the year 2004, up from $ 1. 59 /gal for the same period of the year 2003 and $ 1. 25 /gal for the same 2002 period.
The survey also indicated that the year 2004 first 5 months' average gasoline pump price excluding all taxes was $ 1. 33 /gal vs. $ 1. 18 /gal a year earlier. The 2003 US retail motor gasoline price for all grades-including taxes-averaged $ 1. 64 /gal, according to the US Energy Information Administration. In 2002, the price averaged $ 1. 44 /gal. Analysts forecast that the average pump price for all grades of gasoline will be $ 1. 8 O/gal this year (Sullivan, 531). Residential heating oil prices also jumped last year and remain strong, although they are trending lower.
Inventories of distillate fuel oil in the US were greater in the winter months of this year than at the same time last year. At the end of February, distillate stocks were 111. 3 million bbl, up from just 97. 2 million bbl at the end of February 2003. Residential heating oil prices in the last quarter of the year 2004 averaged $ 1. 42 /gal, down from $ 1. 46 /gal in the same quarter previous year (Greenberg, 173). Real GDP, the total output of goods and services in the US, increased at an annual rate of 4. 4 % in the last quarter of 2004, according to preliminary estimates released by the US Department of Commerce's Bureau of Economic Analysis. In the last quarter of 2003, real GDP increased 4. 1 %.
The major contributors to the increase in real GDP in the first quarter were personal consumption expenditures, equipment and software, private inventory investment, federal government spending, and exports. Imports, which are a subtraction in the calculation of GDP, increased according to EBA. According to industry specialists and macroeconomic analysts, stable performance of national economy, especially its domestic sector, will soften the impact of high cost of gasoline and its price deviations, though Rene Botta indicates that in smaller economies the impact of oil and gasoline market performance would be considerable. From the practical point of analysis, the US economy as well as price performance of gasoline and petroleum products are embedded within the categories of macroeconomic laws. With increased economic output, the US will require more energy than last year. Analysts forecast that total energy demand will be 100. 34 quads.
This would be an annual increase of 2. 1 %. US energy consumption was nearly unchanged last year, posting the slightest up tick in 2003. In 2002, however, demand grew to 98. 2 quads from 96. 3 quads a year earlier. Total US energy demand peaked in 2000 at 98. 9 quads.
Moreover, specialists expect 2005 demand for petroleum products in the US to grow to 20. 5 million b / d , up from 2004 demand of 20. 0 million b / d . Despite higher prices for products, the bustling economy and greater consumer spending power are boosting demand, especially for gasoline. Simultaneously, high demand on gasoline affects the supply of the latter and its price tendencies accordingly. US motor gasoline demand will grow 2. 8 % this year.
Demand for gasoline last year posted a 1 % gain to average 8. 94 million b / d . Year-on-year growth was stronger in the first 8 months of the year 2004, as year's high prices and still-sluggish economy placed a cap on demand. EIA reported that on June 7, 2004 the national average retail price of regular grade gasoline decreased to $ 2. 034 /gal, which was up $ 0. 544 /gal from a year earlier (Greenberg, 175). Strong growth in personal income appears to be the primary reason why demand has not plunged. The most recent EIA data on motor vehicle fuel rates indicate that for 2002, the number of miles per gallon for all motor vehicles declined to 1 7 mpg from 17. 1 mpg a year earlier. The rate held at 22. 1 mpg for passenger cars and 17. 6 mpg for vans, pickup trucks, and sport utility vehicles.
For all other trucks, the fuel rate dropped to 5. 8 mpg from 5. 9 mpg in 2001. According to analysts claims, the notion regarding OPEC as the only factor impacting oil prices should be considered to be a myth. Practically, higher crude oil production does not guarantee that there is more gasoline available for US consumers (Wolfgang, 59). The main factors affecting cost of gasoline in the national economy are fears of instability in key oil-producing countries and regions, and the movement of large investment funds into commodities like oil, and of course, just-in-time inventory practices. Simultaneously, crude oil continues to be a large factor in explaining the price increases over year-ago levels.
According to John Cook, director of Eia's petroleum division, the contemporary increase in crude oil prices is still far from historical high seen in 1981. However, the current change is considered to be fairly rapid, and rapid changes can impact consumers more initially than absolute levels According to continuous debate regarding gasoline cost and price performance, one of the major problematic issues in this dilemma is the US refinery system, and relation of import and domestic crude oil. Refiners in the US feel under siege as they are squeezed between domestic environmental regulations and foreign competition. At the same time, non-US refiners are constantly on the lookout for competitive opportunities in the US market. Information on the competitiveness of new refining capacity at any location may mean the difference between boom and bust for both groups of refiners (Wolfgang, 61). Such information has been determined by investigating the competitiveness of recent investment plans by Petroleum de Venezuela S.
A. (Pda), which include new export refining capacity for the US market. According to the analysts economic analysis, Pdas planned export capacity will be profitable in the highly competitive U. S. refining market.
The economic analysis suggests that conventional refineries in Venezuela are more profitable than equivalent new capacity on the US Gulf Coast. More importantly, in light of recent U. S. environmental policy, Venezuelan capacity to produce reformulated gasoline shows an even greater cost advantage, which is extremely important for US market primarily in contemporary context, though the suggestion should be considered in terms of macroeconomic efficiency not microeconomic level. The dynamics in the U. S.
market look promising for Venezuelan products. This market has historically been the most important market for Venezuelan crude and products. In recent years, more than 50 % of Venezuelan exports have been to the U. S. The US product demand is expected to increase while US refining capacity remains relatively stable. Additionally, new environmental regulations are increasing the pressure on US refining capacity, imposing subsequent cost increase of the final products.
The 1990 US Clean Air Act Amendments require a minimum of 2. 0 wt % oxygen (2. 7 wt % in CO non-attainment areas during the winter months). Other requirements include a maximum of 1 vol % benzene, no heavy metals, and no increase in exhaust emissions. In regard to Venezuela's refining capacity, emissions are to be reduced 15 % from 1990 levels by 1995, and a further 25 % by the year 2000. These reductions must be met for ozone-forming volatile organic compounds (VOCs), exhaust NO, emissions, and toxic emissions, which include benzene, butadiene, formaldehyde, acetaldehyde, and polycyclic organic matter. These standards will be met primarily through the use of reformulated gasoline. This new gasoline will provide immediate benefits using the existing vehicle stock, including the oldest 10 % of vehicles, which are thought to account for over half of automobile emissions.
Reformulated gasoline will be readily available through existing distribution and marketing systems to the US. Soaring demand and tight inventories have analysts predicting that oil could soon cross the $ 40 - a-barrel level. Energy analyst John Kilduff of First USA said his firm expects crude to peak between $ 41 and $ 43 a barrel soon, but then fall back as inventories of oil build up. The last time oil prices broke significantly above the $ 40 -a-barrel level was 1981, after the Iranian revolution curtailed exports from that country (Hall, 321). That is equal to about $ 100 a barrel, if measured in todays dollars. Hedge funds and other players have poured big money into oil futures on expectations of rising prices, driving up petroleum in the spot markets.
PFC Energy, a Washington- based energy consultancy, estimates that the total value of crude-oil futures contracts more than doubled, to $ 26 billion in the last week of April from $ 12 billion a year earlier. The run-up in oil prices is casting a shadow on the world economy just as much of the world is posting strong growth. The US economy is growing at an estimated rate of 4 %-plus, long-slumbering Japan has bounced back and China and India are expanding furiously. However, that very recovery is making oil markets all the harder to manage.
Demand for oil and natural gas is soaring in China and India. In the US, motorists and businesses are driving up a storm, and refineries have not been able to build inventories ahead of demand. The economic recovery and more, larger vehicles on the road pushed April 2004 gasoline demand up by nearly 500, 000 barrels a day, or about 5 % more than at this time last year The rise in oil prices is potentially troubling, because most of the major downturns in the industrialized world since the 1970 s have been foreshadowed by crude-oil shocks. The International Energy Agency warned in a report that a sustained rise of $ 10 a barrel to $ 35 a barrel in the oil price, such as the one the world has been seeing for several months, would shave at least half a point off global economic output in the following year.
Rising oil prices pose two threats. High gasoline prices subtract from consumer purchasing power, weakening consumer spending. They also raise companies costs, which may be passed on as higher consumer prices, threatening to boost inflation. This could complicate life for the Federal Reserve, since weaker consumer spending would call for lower interest rates but higher inflation would call for higher rates. However, the Federal Reserve so far appears unconcerned.
Rising employment is mitigating the hit to purchasing power from higher energy prices. At the same time, spikes in oil prices in recent years have tended to have only a temporary impact on inflation. The central bank said the economy continues to grow at a solid rate and despite an increase in measured inflation due in part to higher energy costs, consumers expectations of future inflation are well contained. Bibliography John Wolfgang. , Comparative Economics of Petroleum Products.
Colorado School of Mines, Golden, November 2004. John Hall. More gasoline politics. Oil & Gas Journal.
Tulsa: June 15, 2004. Vol. 108, Iss. 11 Atlanta Sullivan. Industry Trends. Oil & Gas Journal. Tulsa: Mar 8, 2004. Vol. 102, Iss. 10 Karl Greenberg.
Strong demand firms oil pricing Chemical Market Reporter. New York: April 3, 2004. Vol. 257, Iss. 14
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Research essay sample on Will The Rising Cost Of Gasoline Ever Stop
