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'Demand for gasoline' - short econ paper

loflo 2 / 2  
Mar 7, 2012   #1
Paper 1
Gas prices reached an all time high for February this year. Michael D. Shear of The New York Times reports in "GOP sees chance to attack Obama on rising gas prices" that gas prices are estimated to reach four dollars per gallon as prices continue to rise through the spring and summer months. These prices will be the highest consumers have seen in years. An anticipated disruption in global oil trading pushed the price of a barrel to $103, a thirty-four percent increase from September's prices. The average price for a gallon in the United States in February was $3.52, showing a thirty cent increase in the last two months. The Obama administration is trying to combat the economic burden of rising gas prices by pushing Congress to extend the payroll tax cut, which amounts to $40 per paycheck for families earning $50,000 a year. When President Obama took office, gas prices averaged $1.89 a gallon, but have risen ninety-one percent since. Republican presidential hopefuls blame rising prices on Obama's alternative energy policies and call for an increase in domestic drilling and approval of the Keystone XL pipeline. In response, Obama will focus on his actions to increase fuel efficiency and develop new types of oils that would diminish the country's dependence on gasoline.

Gasoline prices rose in part due to a warning from Iran, the world's fifth largest oil producer, that it would immediately cut off oil supply to some European nations in response to Europe's sanctions against the Iranian nuclear program and a planned European embargo of Iranian oil. The supply shock caused by Iran would send gasoline prices soaring, much as they did during the OPEC embargo in the 1970s. Because gasoline sellers are expecting a reduced supply of crude oil, the main and most expensive input for gasoline, they increased current gasoline prices in response.

Demand for gasoline is inelastic in the short run because consumers have few substitutes to turn to, therefore, consumers bear the majority of the burden of price increases. In the long run, demand is more elastic because possible substitutes increase, such as carpooling, using public transportation, or rearranging one's schedule to minimize outings. The long run elasticity in demand for gasoline was one reason for the low $1.89 per gallon average at the beginning of Obama's presidency in 2009. Demand for gasoline had dropped in response to high gas prices, which peaked at $4.11 per gallon in July 2008, and the financial crisis that began about a year earlier. A decrease in demand caused by both events made the price of gasoline decrease. To combat rising prices now, President Obama urged Congress to extend payroll tax cuts. If the tax cuts are extended, families will have more disposable income to spend on goods like gasoline, and therefore, will not reduce their demand for gasoline in the coming months as much as they would without the tax cuts. The extra income somewhat cushions the gasoline market from the effects of the supply shock.

The current national average for regular unleaded gasoline is $3.77 according to the AAA fuel gauge report. The current average per gallon reflects a ten cent increase within the last week. If prices continue to rise, Americans will look for ways to decrease their monthly gas expenses, including buying more fuel efficient cars. Republican presidential hopeful Newt Gingrich has a different solution: He wants increased domestic oil drilling. The increase of oil supply from increased domestic drilling would lower the price of gasoline. It would also make the United States less dependent on foreign oil suppliers, and therefore, less vulnerable to supply shocks or artificially high prices. In response, Democratic party leaders point out the large subsidies given to US oil companies. These government payments to oil companies increase oil company profits, but at the same time add to the government expenditures, and hence, the deficit. However, because demand for gasoline is relatively inelastic, consumers should also be receiving a benefit from the subsidy.
EF_Susan - / 2,364 12  
Mar 8, 2012   #2
Gas prices reached an all time high in February of this year.

Michael D. Shear of The New York Times reports in "GOP sees a chance to attack Obama

So all in all, it's a win win situation for the gas and oil companies! grrr, this all ticks me off!!! Good luck with school and have fun!!


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