The Effects of Petroleum Prices on the Economy

The Effects of Petroleum

Prices on the Economy

          Crude oil prices have taken a dive in the last month, causing the gasoline prices to plummet.  Consumers are more than ecstatic to see the prices fall, but this current trend in prices will undeniably be short term.  For most of us the prices of petroleum is only apparent at the gasoline pump, but there are multiple products affected such as diesel and heating oil.  The intent of this paper is to focus more on gasoline prices, supply and demand of gasoline, and elasticity demand of gasoline, externalities, regulations, and taxes that have put into place regarding gasoline.  Also, explaining the underlying origin of such a histrionic change will give a better perspective to all consumers.  

    Let’s start by explaining what OPEC is and their involvement in the petroleum market. Organization of Petroleum Exporting Countries (OPEC), is an intergovernmental organization consisting of Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, United Arab Emirates, Algeria, Nigeria, and Angola ( Brief History, 2015).  OPEC was established in 1960 with five original countries and has since added numerous more.  The initial and current objective of the OPEC is to maintain prices that are both consistent and protected for the producers of petroleum.  OPEC intends to supply the consuming nations with petroleum while gaining a just return on capital to those investing in the industry ( Brief History, 2015).  

     How have changes in supply and demand affected oil’s equilibrium price and quantity recently?  How would that affect the market for gasoline? Amplified oil supplies leads to a smaller price and a higher quantity of oil.  Since oil is the primary contribution of gasoline, the effect of lower oil prices would be to lower the cost of gasoline production. As the cost of production lowers, producers supply surplus amounts of gasoline at every price in the market. Consumers, respectfully following the law of demand and stand more enthusiastic to purchase gasoline as the price lowers.  Comparing the current and past prices of gasoline it is clearly evident that the production of gasoline is less and causing the price for the consumer to be less.  This is more evident in the past month, the following is an example of that:

The U.S. average price for regular gasoline as of December 29, 2014, was $2.30 per gallon, down 10 cents from the week prior and $1.03 per gallon lower than the same time last year. The Rocky Mountain price declined 16 cents to $2.23 per gallon, followed by the Midwest price, which fell 14 cents to $2.09 per gallon. The Gulf Coast price decreased 10 cents to $2.07 per gallon, while the East Coast price was down nine cents to $2.44 per gallon. (energy, 2014)

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(energy, 2014)

Another topic to consider is: would you consider gasoline to be a product with a highly elastic demand?  Do you think it might have a high elasticity of supply?  Understanding what elasticity and elastic demand are is important.  Elasticity is the measure of responsiveness of quantity demanded or quantity supplied to a change in one of its determinants (Mankiw, 2015).  Elastic demand is a measurement of how much quantity demanded responds to a change in price (Mankiw, 2015).  Now that the understanding of elasticity and elastic demand have been established let’s look at how that relates to our current oil market and the price difference in the last month of gasoline.  Gasoline is highly elastic, as long as gasoline is produced there will be a demand for it.  Recent years have proven just that.  Whether or not the supply of gasoline holds a high elasticity is questionable.  As long as there is a demand for a product, producers will produce the product.  If constant demand for a product causes the elasticity then, yes, gasoline elastic.