Rising and Falling of Gasoline

Rising and Falling of Gasoline Prices

Since the American economy is dependent upon transportation -- and transportation, including the personal need to have automobiles, depends on fossil fuel / gasoline -- a great deal of attention is paid to the cost of gasoline to the business and the consumer. In times when gasoline prices spike to previously unheard of levels -- taking money out of the hands of consumers that they would normally use to purchase important goods and services their families need -- a great deal of discussion (including loud protests) is set in motion as to why the price of gasoline is so unpredictable and in many cases so unfair. This paper raises questions about the rise and fall of gasoline and presents answers from the literature without editorial comment. This paper also explains that there are global dynamics that impact gasoline prices, it explains why gasoline prices can change consumer behaviors regarding their grocery shopping habits, and it explains the link between gasoline prices and obesity.

Why do gas prices rise and fall so dramatically?

An article in the peer-reviewed publication, the Energy Journal (Kilian, 2010, p. 87) points out that important components to the complete understanding of why gasoline prices move up and down sometimes quickly have been ignored and hence are misunderstood by the public. First of all, there are solid reasons as to why gasoline prices can rise so quickly; these explanations have nothing to do with the cost of producing crude oil in Saudi Arabia or in the United States. When there is a refinery fire, a change in the "regulatory environment," or there are electrical outages caused by hurricanes or other natural disasters, refinery production can be shut down, which raise gasoline prices (Kilian, 88).

The author refers to the fact that when it comes to crude oil "…each demand and supply shock" has a "distinct dynamic" effect on both the price of crude oil and the price of gasoline (88). In 80% of the instances of gasoline price fluctuations worldwide "refining shocks" are the cause; and the other 20% of instances where gasoline prices increase dramatically is due to "oil-market specific demand shocks" (Kilian, 89). In the U.S. specifically, 54% of the "variation in the real price of gasoline" is caused by "demand shocks" in the crude oil markets. But what does that really mean?

When there is a reduction in global demand for crude oil, gasoline prices drop in the United States; and when there is a strong, urgent global demand for crude oil, and the oil-producing countries cannot meet the demand, prices of gasoline at the pump go up, sometimes to outrageously high prices (Kilian, 92).

What do gasoline prices have to do with grocery shopping?

There are good reasons why consumers should know not just why gasoline prices go higher but also they should know how family budgets can make adjustments to those higher gasoline prices. A peer-reviewed research piece in the Journal of Marketing (Ma, et al., 2011, p. 18) explains what happens at the grocery story when consumers have to pay sky-high prices for gasoline. For example, it is obvious that high gasoline prices reduce disposable income for families and hence those families -- if they are smart and savvy -- adjust their spending in carefully crafted ways. When gasoline prices are low, as they were in July 2003, families spend an average of 4.6% of their median incomes on gasoline; but when prices spike, as they did in July 2008, households spend more like 11.5% on gasoline (Ma, 18).

So what can consumers do vis-a-vis shopping for groceries when gasoline prices take away significant portions of their disposable incomes? Firstly, on page 21 Ma explains that smart shoppers go to warehouse club centers and "supercenters" where prices are lower due to the mass volumes of products sold there. Yes, Ma admits, supercenters and warehouse clubs may be further away than local grocery stories, causing more gasoline to be used; but on the other hand, customers buy in bulk at those outlets, reducing "the number of shopping trips" necessary (21). Secondly, smart grocery shoppers turn to "private labels" on food products that are as a rule 20% to 30% less than national brand labels (Ma, 21).

Will higher gasoline prices have a positive impact on America's rising obesity rate?

While Americans are being more selective about where they shop for groceries -- due to the higher cost of gasoline -- the higher prices may as well lead them to be more attentive to their own health as well. The author of an article in the scholarly journal, Economic Inquiry suggests that higher gasoline prices could cause people to walk more often (rather than driving) and could lead to a "…reduction in the frequency with which people eat at restaurants" (Courtemanche, 2011, p. 935).