Economic Gas Outlay: Why Gas Prices Will Stay High - Economics Essay Example

 

 

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Article summary

The article identifies the major reasons why oil prices have become high and will remain high. Lynn Westfall, chief economist for Tesoro (TSO), suggests that the increase in the cost of crude per barrel leads to an increase in the prices of gasoline. The chief economist also suggests that the cost of investment for a new refinery would be at least $16 billion and would depend on several factors like pollution control, the cost of human labor, and the maintenance cost for the refineries. Moreover, the huge increase in global consumption levels has led to an increase in consumer demand and a lengthy process of extracting and refining of crude oil. In essence, the article conveys that the pending situation of high gasoline prices will not be resolved overnight and that the existing social conditions—especially the presence of legal sanctions and proscriptions—will suppress the possibility of maintaining the status quo or of lowering today’s dizzying oil prices.

 

 

Primary Economic Elements

Mechanical enthusiasm scaling from simple lawn mowers to complex factory engines, as well as the trend for travelling and other interests of the like has thoroughly mounted the demand for gas.  Given with such instances, the production of gas has been failing to meet that demand, so the anticipated and foreseeable price ceiling is not able to reach the “ideal” economic state of equilibrium. According to the analysis discussed in the article, it is evident that the catastrophically-triggered instances in the past few years have gravely affected the circulation of natural resources and minerals.

The statement given by the chief of Tesoro Corporation (a company engaging in marketing and refining petroleum products in the United States) that the rapid increase of gas prices, ranging from a shoot up of over $3.20/gallon, commenced the problem which is now taking occurrence in the arena of gas production.  Moreover, the fact that consumers have spent approximately $20 billion in this year alone, making the parallel cost of crude somewhere between $30 and $70, is a manifestation that production has depleted at the rate of 2.5 refineries every two years. Because of the disproportionate rise and fall of demand and supply, the problem is burdening contemporary consumers.

Hence, the predicted remedy for such an imbalance in the economic symmetry is taken from the idea of the construction of new refineries. However, constructing new refineries is rather costly in terms of materials, labor, and time. Gas companies are reluctant to take such risks. As for recent analysis of supply and demand, analysts have suggested that there are still 150 grades of gasoline fit enough for use in various states. However, the fear of running down the supply by using these grades is legitimate since refineries need the precise ratio to continue operation. Importing more oil only increases the problem because of the 13% tax on importation.

 

 

 

 

Graphical Analysis

The undeniable fact is that the earth, the constant audience of natural catastrophes, is facing a huge problem in maintaining the oil supply now and in the future. Oil prices in London have inclined beyond $70 a barrel,[1] fuelling worries over supply (see graph on next page).

The United States’ disproportionate economic equilibrium is likely to continue to haunt its citizens since the fear of not meeting the probable stability of the range on price (P), quantity (Q), and demand (D)[2], as represented in the graph below, is already hard to attain. With all the reasons and complications established by the article, surveys, and other news broadcasts, it is evident that suppliers’ ability to fulfill the needs of the society is hampered by the web of complexities caused by both natural and man-made catastrophes.

The increase in demand is met with a proportional increase in supply as illustrated in the graph (next page). The same is true for price and quantity.  In an ideal equilibrium, demand should never overlap supply to create balance in the production of needs.

The explanation of economic equilibrium is further emphasized on the next graphical representation (see graph below) in which the supply line changes when the prices also change, thus in a congruent scheme. In point A, supply (1) and demand (1) have met in the most ideal way, (as reported, it is evident that the supply of gas has met such a requirement for the past few years), and as demand increases (D2), supply also increases (S2) so that it is still able to maintain economic stability.

Conclusion

Prices on fuel outrageously mount, while the production of supply is belligerently met. It is evident that there is an economic imbalance; the government should seek economic stability to assuage society’s fear of a scarcity of resources. However, that scarcity will most likely occur. Such scarcity will lead to poverty (“Why Gas Prices Will Stay High,” 2007); therefore, the government should take action as soon as possible.

Economic stability depends on a balance between production and consumption—they should increase and decrease in proportion. What one takes, one must sustain. With that equilibrium, there will still be more for the future. Another issue in this mix is the sustainability of resources. Numerous government agencies are now focusing on the environment and on natural threats that are beyond human control (McPhee) in an effort to determine the appropriate amount for the restoration of lost or damaged properties, specifically when it comes to “mineral resources” destroyed by natural catastrophes.

The change of the price of oil is dependent upon the trade specifications or laws stated in a state’s contract on import and export. Its primary goal is to stabilize the exchange of goods or energy for the benefit of the benefactor. The changes also depend on the provider’s ability to produce. The less a resource is available, the higher it’s cost in the market.

 

 

Reference

Why Gas Prices Will Stay High[i]

Top News June 4, 2007, 12:01AM EST

The chief economist at gasoline distributor Tesoro argues that a shortage of refining capacity is the culprit for consumers’ pain

You have to give Lynn Westfall credit. Not only is the chief economist for Tesoro (TSO) willing to talk to reporters as gasoline prices shoot up to a record of more than $3.20 a gallon, he even stopped by BusinessWeek’s Los Angeles offices recently to discuss why prices are so high with Senior Correspondent Christopher Palmeri.

Westfall doesn’t paint a pretty picture for motorists as Americans begin the peak summer driving season. Prices are likely to stay high for the foreseeable future, he says, hitting consumers in their pocketbooks. The Government Accountability Office (GAO) says that consumers already have spent $20 billion more on gasoline this year than last.

Tesoro and Westfall have emerged as more prominent players in the energy industry. The once sleepy, San Antonio-based company has in the past 10 years become a major force in gasoline distribution. Tesoro snapped up half-dozen refineries, most recently the $1.8 billion purchase of a Los Angeles plant, and 278 gas stations from Royal Dutch Shell (RDS). Last year, Tesoro earned $800 million on sales of $18 billion. In just five years, its stock has shot up from $2 a share to $120, a performance that recalls of dot-com back in the day.

What’s been behind the recent runup in gas prices?
First of all, you have to remember that 60% to 70% of the cost of gasoline is the cost of crude. When that doubles from $30 a barrel to $70, prices go up. This spring we had a number of refineries not running well. In the past, the industry had spare capacity. If a refinery was down we’d run the rest at a higher utilization. Gasoline demand has grown at a rate of 2.5 refineries every couple of years. We can’t expand existing capacity at that rate. The industry is running at full capacity.

Sounds like someone should build a new plant. Hint, hint.
You’re looking at seven to eight years and costs in the billions. Kuwait was looking at building a refinery. It was originally projected to cost $6 billion. Last November the price had run up to $10 billion. By February, it was $16 billion and the project was canceled. In the U.S. we’re looking at twice the cost because of pollution controls. Now are you going to go to your board of directors and argue for an investment like that?

There are folks in Washington who say there is a conspiracy on the part of the industry to drive up prices, and that anti-gouging legislation, a windfall profits tax, or some kind of breakup of the big oil companies is in order.

There’s never been a successful case for gouging or price-fixing against our industry after all these investigations and all these years.

What would it take to get you to build a plant? Tax breaks?
You can’t give enough incentives.

Are the big oil companies doing all they can to produce more oil?
There’s never been a liquid shortage. When the hurricanes hit a couple of years ago we were being offered crude from places we’d never seen before. There’s a lot of panic built into the price, out of fear there will be shortages. And there’s been a lot of money from hedge funds looking for a place to invest.

What impact do regulations on greenhouse gas emissions, such as those in California, have on your business?
We’re still waiting to see what the regulations will be. They want to take us back to 1990 emission levels by 2020. We can add new insulation, burner tips, and oxygen sensors to reduce our consumption. Two-thirds of greenhouse gas emissions come from burning transportation fuels. If we added more ethanol to gasoline, do refiners get credit for that?

Do environmental regulations affect supply?
Right now, there are 150 grades of conventional gasoline to meet requirements in various cities and states. The specifications are so tight. In the past if one unit at a plant went down, you could still make gasoline. Now every unit at a plant is required to be running at exactly the right ratio. The industry wasn’t built to handle this capacity. We’re importing more gasoline than ever, 13% of demand. But the foreign refineries were not built to manufacture our grades of gasoline.

So the future is continued, high prices?
Our society was built on cheap energy. You don’t have a lifestyle anymore where you live and work in the same little village. We’re seeing tremendous growth in production in places like the Rocky Mountains, but it’s only been two years ago that oil producers bumped up their long-term price forecast from $20 a barrel to $40 a barrel. It took 25 years to get in this position. It won’t get solved quickly.

 

 

 

 

 

 

 

 

 

 

 

[1] “Oil Price Tips over $70 a Barrel.” BBC News, 2007.
[2] “Economics: In One Lesson.” Hazlitt, H. (1998).
[i] Why Gas Prices Will Stay High. (2007, June 4, 2007).   Retrieved July 27, 2007, from http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070604_769679.htm

 

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