macroeconomics and gas stations

There are two dynamics at play here. First, the GDP of the area in which the stations are located influences gasoline consumption, by influencing how much people use, and how many people live and work in the area. On a bigger level, economic growth on the global scale is a driver of demand for oil products, and will therefore influence the price of oil.

The GDP growth rate for the third quarter of 2016 was 3.2%, up from 1.4% in the second quarter (BEA, 2016). The GDP growth rate fluctuates quarter by quarter, so long-run trends are more important for analysis. The GDP growth rate reflects the rate at which the economy is growing. GDP is gross domestic product, which is the value of goods and services produced domestically. This includes consumer consumption, government spending, business investment and foreign inflows. The GDP does not include the value of American investment abroad. A growing GDP typically reflects a higher demand for fuel, and gasoline is one of the most predominant types of fuel used in the United States. For example, if the GDP is this city is growing, that will typically mean more people driving to work and more delivery drivers. The gas station will have more customers if there is more economic activity in the area.

One of the ideas that was expressed was that growing demand for oil internationally -- such as in China and India -- will spur higher prices in the global market. This is generally true, though supply forms an important counterpoint to demand. Rising demand only results in increased prices when supply grows more slowly than demand does. In recent years, OPEC has kept oil supplies high in order to suppress the price of oil, despite increasing demand (Plumer, 2016).

The concept of the business cycle is important to some economic theories. Basically, the business cycle is "the fluctuation in economic activity that an economy experiences over time" (Investopedia, 2016). The cycle is expansion, peak, recession and recovery. In general, the American economy has been in slow recovery for several years following the last recession. It is not known when a full-blown expansion will take place; there are few economists who are expecting one imminently. But regions can also experience business cycles. One of the important ramifications of this is that the gas stations purchased should be in different areas. If one area is struggling, then maybe another will be doing well. Geographic diversification can help offset the impacts of local business cycles.

It is worth considering the national-level business cycle, however. At the national level, a recovery period sees slow growth, and the next stage is expansion. If this expansion occurs, it will drive growth and therefore demand for oil. If it does not, then demand will remain static. There is also risk of further recession, but business cycle theory argues that this would only occur following another expansion-peak stage.

Fiscal policy is uncertain right now with a new president coming into office. There are apparently mixed signals with respect to fiscal policy and what governmental priorities are going to be, making this a tough time to predict which direction the economy is going to go in. So it might be best to think of business cycle in local terms -- what will happen with the local economy? Will unemployment rise or fall? If it looks like it is trending the wrong way, or will trend the wrong way with a new government, that might help make a "go/no-go" decision with respect to buying gas stations in this particular market.

There are a few reasons why monetary policy should be evaluated separately from fiscal policy. First, it is run by a different body (the Federal Reserve, rather than Congress). The Federal Reserve's most recent signals to the market are the higher interest rates will be required. This has implications for both the overall health of the economy and for the decision to buy a gas station. First, higher rates are likely because the economy is nearing full employment and thus inflation is going to be more of a concern going forward (Matthews, 2016). Second, high rates affect the cost of debt.

If inflation is a risk, higher rates will arrive, and they will serve to put a cooling on the U.S. economy. Yet, growth is not that high, so this cooling effect could be quite negative, especially in regions that are not yet growing strongly. It matters where these gas stations are. Furthermore, if Edgar is thinking about borrowing to finance this gas station, he should looked at fixed rate products. They will have already priced in some increase, but a floating rate exposes Edgar to much more risk. He should base his decisions on financing in part based on what sort of financing costs he is going to pay over the life of the loan, and those are changing with the changes in monetary policy.

International trade matters for a couple of reasons. First, it drives the oil market, and second because of the influence that it has on the U.S. economy. First, the oil issue. Oil demand globally is driven by economic growth rates, and these are closely tied with increased trade. Knowing the overall strength in global trade is important. Will higher gas prices and higher U.S. interest rates cause global trade to slump? They could, and Edgar will have to take that into consideration. Strong trade has bolstered many economies -- a good example being China -- and those economies are helping to drive more demand in global oil prices. While recent years have seen supply easier to manipulate than demand, higher demand is still correlated with higher prices overall.

Another issue in international trade is that the U.S. generally has open trade relationships, and these relationships have allowed for strong growth in some sectors of the U.S. economy, while harming others. The incoming president appears to have an issue with international trade deals. Any move on these deals, however, could result in diminished investor confidence in the U.S., and lower levels of international trade. Protectionist policies ultimately do not work, and cause the economy to suffer needlessly. So the country's stance towards international trade is going to have some influence on future GDP growth, which will be harmed if the U.S. scales back on its trade deals.

The oil business is a good one to be in because so much of our society is based on burning fossil fuels. A gas station owner sees mostly consumers driver cars, but there are also all the trucks and freighters used to send goods all over the world, a lot of electricity is provided by oil, and basically the things that oil allows us to do are not often replicable using other fuel sources. The result is that we have a low price elasticity of demand for oil. Consumption is largely fixed, understandable on a per capita basis, and this seldom changes much with changes in price. Only in the long run do consumers change the way that they make decisions based on oil prices, and then only a little bit. So what this means is that the gas station has the ability to change its prices in line with changes in the price that Edgar will pay his suppliers. He will not be squeezed much by higher prices.

Population growth is one of the drivers of higher GDP. In most parts of the U.S., the population is rising. Population growth is key to business growth, because demand for gasoline is directly related to the number of people in the area, as well as the overall GDP. So Edgar should use the latest demographic information to determine how many people are in the area, is that number growing, how wealthy are they, and how many gas stations /capita does the area have. And how does that compare with the national averages. If the area is growing, then it is likely that Edgar's business will grow in line with that population. Further, if population is growing, is that adults who are coming there to work, or does the area just have a high birth rate? It is important to do a deeper dive into the demographics of the region to truly understand the market. The U.S. Census Bureau breaks down census data for each city, but also zip code, and county, so it is easy to understand the demographics of the given area.

Not knowing where these gas stations are makes it tougher to really make a credible recommendation, but based on the evidence gathered to this point, there is good reason to recommend that Edgar invests in these gas stations. The demand for gas is fairly stable, and consumers are generally price inelastic. They will pay whatever the market is charging. Gas stations generally have no control over what they pay for fuel, but they know that they can charge any margin and win business, passing along price increases to the consumer. Indeed, during periods of high prices, gas stations often make more money, because the percentage margin that the use deliver higher dollar value profits per gallon.

The population of the U.S. is rising -- though Trump's deportation plans would lower the population by quite a bit if those plans ever came to fruition. They won't. But more important, the long-run trend in the U.S. for a rising population. The country is also experiencing GDP growth, and should in theory be entering an expansion stage of the business cycle. The result should be sustained growth over many years that ultimately helps to drive higher sales at the gas station. Wealthier consumers will also buy more snacks, booze and smokes, too, which should help the station as well.

The demand for oil is growing around the world, and at this point the supply is set to decrease. This will result in an increase in fuel prices, but most likely the impact of that will be that the margin are higher for Edgar, so this can be seen as a positive thing. The overall world economy is still oriented towards increasing international trade, though there is concern that protectionist policies in the U.S. could undermine economic growth.

However, most variables are pointing towards higher growth going forward. A reason for caution would be that if fuel prices rise, this will increase inflation, and the Federal Reserve is already poised to increase rates. Such an increase will put the economic growth pattern at risk. So a balance needs to be struck there, but this is definitely something Edgar should be aware of, especially if he is considering borrowing money to pay for this gas station,.