Supply and Demand: Gasoline

Supply and Demand: Gasoline

I am a husband and a father of four lovely children. We need a large vehicle to haul all of us around town. And of course I would do anything to keep them safe and I always want to provide them with the best. Therefore, after the birth of our forth child two and a half years ago, my wife and I decided to upgrade our Ford Explorer to a Ford Expedition. We got everything from the side-curtain airbags to the TV and DVD player. What we did not know was we also purchased a rather large unleaded gas bill. The first time we filled the tank it cost us roughly $35; today it costs us right around $75 to fill the tank. Obviously the price of gas has increased significantly in the last two years. The price increase is due to a fluctuation in the supply and demand of not only gasoline but also crude oil, which is needed to manufacture gasoline. In addition, several other factors are influencing a change in the price of gasoline.

In 2004, crude oil producers around the world expected a 1.5% growth in the world’s demand for crude oil. The actual growth rate was more than double the projections at 3.3%. This growth was due to rapidly industrializing of foreign countries such as, China and India. Therefore the lack of crude oil affected the supply of gasoline to consumers at the pump.

Another factor contributing to the supply of gasoline was unexpected production difficulties. During 2004 three unrelated events had a significant affect on the supply of crude oil. The first were the Insurgent attacks and the war in Iraq. It made it very difficult to properly export the oil. Many of the Iraqi refineries simply stopped production during this time.

The next event was the Gulf Coast hurricanes in 2004 – Charles, Frances, and Ivan. Each hurricane disrupted the output of crude oil in U.S. refiners.

The third event was a workers strike in Norway. Norway is the third largest exporter of crude oil. Three separate strikes over a five-month period severely influenced production.

The supply of gasoline to various regions of the United States also plays a significant role. The country is divided into five different regions: Gulf Coast, East Coast, Midwest, Rocky Mountain, and West Coast. Some of these areas do not have enough refineries in their own region to support the consumption and therefore need it brought in. For example, the West Coast has very limited pipeline connections from the other regions. It must rely on water shipments and its small amount of refiners for its supply. If something should happen to the water shipments, i.e. a hurricane, tsunami, etc. it would greatly effect the supply of gasoline.

The demand of gasoline has increased steadily over the last twenty years. In 1981 the U.S. averaged 6.5 million barrels of gasoline consumption per day. By comparison, in 2004 the U.S. averaged 9.2 million barrels of gasoline consumption per day. For most of this time period, gas prices stayed relatively the same. This is because the U.S. refineries increased their production to meet the demand and maintain the equilibrium price. Also during this same time period worldwide demand for crude oil increased 27%. Crude oil producers also increased their production to meet the demand keeping prices the same.

The price of gasoline is affected by many different factors. However the biggest influence on the price of gas is crude oil. The federal trade commission conducted a regression analysis of the U.S. annual average gasoline price with the annual average price of recognized crude oil price. The findings showed crude oil accounts for 85% of the change in gasoline prices. Therefore as mentioned earlier, when the worldwide demand for crude oil increased significantly in 2004, the