Why Gas Prices Are on the Rise and Possible Solutions for the Problems Term Paper

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gas prices are on the rise and possible solutions for the problems!

One of the fundamental laws in economics is that the price of any item is determined through the laws of supply and demand. Thus to judge this question it is important to look into the supply and demand situation.

We shall look at the different aspects of the problem.

Sources of oil:

The figures that are now available are for 2004 and that showed the total imports of United States to be 61% of the oil that the country consumes, and that amounts to a total of 13.12 million barrels a day out of the total usage of 21.4 million barrels a day. The largest imports are from Canada, Saudi Arabia, Mexico and Venezuela to United States. The only country from which United States has been importing oil, and where a warlike situation now prevails is Iraq. During 1990, imports from Iraq were about 6.4% of the imports in United States. During the period from 1991 to 1996, there were no imports from Iraq as there were sanctions against the country. The latest years give the figure of imports as 6.7% in 1999, 5.4% in 2000, 6.7% in 2001, and 3.9% in 2002. Thus the imports from Iraq are less than 4% and war does not directly influence the flow of oil into United States. (Some interesting oil industry statistics)

There is no steady pattern of imports, but the quantity imported varies from month to month. In 2002, the largest imports were from Canada at 17%, followed by Saudi Arabia at 13.7%, then by Mexico at 13.5% and Venezuela with 12%. Thus the imports from the last three countries are almost at the same level. The import from the OPEC countries was 40% of all American imports. OPEC includes a large number of countries including Venezuela and Indonesia, which are outside the Middle East and have not been directly affected by war for a long time. We are not discussing the distribution of production within United States by different areas, as that has not had any significant effect, but who knows what Hurricane Katrina will bring. (Some interesting oil industry statistics)

Production costs:

The production of gasoline from crude oil also produces a number of other items. From one barrel of crude oil, at the end of the production process we get 19.5 gallons of gasoline, 9 gallons of fuel oil, 4 gallons of jet fuel, and a total of 11 gallons other products including lubricants, kerosene, asphalt, and other petrochemical feedstock to make plastic. Gasoline is the item produced in the largest quantity and thus the price of gasoline depends largely on the prevalent price of crude oil and most of the profits after incurring the expenses go to the owners and producers of the oil. It does not matter who those producers are -- governments of other countries or oil producing companies. In most parts of the world, individuals pay much more for the gasoline they use when compared to United States, and the reason is that there are large taxes of the government which amount to more than $3 to $4 per gallon even in the European countries. (Some interesting oil industry statistics)

The costs for production and related profits can be shown as detailed -- production cost varies between 15 cents to 60 cents a gallon depending on the origin of the petroleum; this leaves a profit from 53 cent to 8 cents for the producer depending on his relationship with the source of oil; the refining cost is about 13 cents a gallon; the marketing costs are about 5 cents a gallon, transportation costs are about 15 cents a gallon, retailer costs are about 6 cents a gallon, the profit that is earned by refiners, marketing organization, transporter and retailers total to about 10 cents, the federal government taxes are about 19 cents and the taxes of the state government is about 23 cents. This leads to a total price of $1.59 a gallon. The costs for production of petroleum and the profits from production is different in different countries and depends on the laws of the country and the taxes that are payable to that country for the production of petroleum. It also depends on the usage of petroleum and thus there will be a lot of difference for petroleum produced in Saudi Arabia or United States. (Some interesting oil industry statistics)

It has been seen that more than 98% of U.S. carbon dioxide emissions can be found in the combustion of fossil fuels. Compared to this, less than 2% is from other industrial sources, inclusive of the manufacture of cement and lime. Total estimated emissions had enhanced by 1.5% which is 22 million metric tons of carbon, compared to 1996 values of 1,479 million metric tons to 1,501 million metric tons of carbon in the year 1997. In comparison to the 1990 emissions levels, the increase was by 145 million metric tons of carbon or 10.7%. U.S. carbon emissions have been increased annually since 1991. These are the figures available and one presumes that the same trend is continuing. In terms of different sectors, the share of transportation was of 473 million tons of carbon, for industrial the share is 483 million tons of carbon, for commercial usage was 237 million tons of carbon and for residential use was 286 million tons of carbon. The growth was by 4.9% a year for commercial usage as compared to 0.3% for residential usage. The high increase in commercial sector was through the use of coal for electricity production and this led to the higher release of carbon dioxide. (Overview: Carbon Dioxide Emissions) Thus it is clear that the costs to health are not changing much due to use of gasoline, but the concentration should be on total usage of energy.

At the same time, it is useful to get some mental images of the U.S. usage of oil. This was over 20 million barrels a day in 2004 - an increase from 2002 figures of 18.5 million barrels a day. Since the figures in barrels are not clear, this can be viewed as 777 million cans. If this quantity is filled in one gallon cans and lined up on the earth around the equator, they would around the earth 6 times, as it involves 147,000 miles of cans. The consumption of the country every day will be enough to make a column of oil 2,500 feet high covering an entire football field. (Some interesting oil industry statistics) It does not really matter whether the U.S. problem of consuming gasoline is the worst or not in terms of pollution, it is still a matter to cause justifiable concern.

Shipping Costs:

As already shown, this is in two parts, and the first is on the basis of the account of petroleum, which will-based be on the account of the manufacturer who is getting the oil in the country, and the second is in relation to the transportation cost within the permits of the country from the level of the refineries to that of the retailers. The first part is being affected in terms of international shipping costs, but the second is considered to be totally local. However as a matter of interest, it is to be noted that the oil tanker capacity in relation to trans-oceanic shipping is also 100% which has been reserved for the foreseeable future, and shipping costs have almost nearly increased thrice. (Some interesting oil industry statistics) Thus it is not likely that oil shipping costs will come down. The major problem that is being seen now in increase of gasoline prices is due to the increase of petroleum prices at the international level, and does not have much to do with local factors.

Fossil fuels:

An analysis of the gasoline prices has shown that there have been increases in summer traditionally during the summer driving months from June to August, but during the period from 1999 to 2001, the price rises were very sharp. This means that there was a rapid increase in price followed by slow drop and the decline did not keep pace with the increase. As a result, the price increased by about 20 cents per gallon. To an average household, this increase meant an annual increase in expenditure of $150 in a year. This had been in part due to the cost increases of oil and in part due to an increase in the refiner/marketing organization share of the price. As a result, the share of the refiner/marketer doubled in the year 2000 and again in the first five months of 2001. The increase in costs to consumers was of the order of $11 billion. The increases in prices were managed as there is inadequate capacity in U.S. As also inadequate competition. The Seven Sisters have now become Three Sisters. The underlying tight condition in the market was due to increasing demand as also…[continue]

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