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Macro Economics – Oil and Gas Essay

Oil and Gasoline Prices in the US Oil and gasoline prices follow a trend that sparks mixed reactions from different industry stakeholders in the America’s economy. The trends on oil and gasoline and their stability have immense impact on the performance of the economy based on their primary as energy. The government’s ability to ensure stability in price movement is seen as a key step towards fostering steady economic growth. A variety of factors are at play in the determination of these trends exhibited by the oil prices in America.

Some of these factors are attributable to the market forces and understanding them would be instrumental in resolving economic problems resulting from the surging oil prices. In 2011, oil prices were reported to have reached a record high placing the rise of Brent crude oil’s price at 70% relative to expected market prices (Yelled 1). Although the oil price increase was coupled with a rise in prices of non-fuel commodities, its high increase can be viewed as an indicator of the oil prices instabilities, which would be detrimental to the economy.

Confirming the normal trend in oil prices, a port by the US Energy Information Administration (EIA) has revealed a rise

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in oil and gasoline prices in the onset of the year 2013, which suggested that the rise was not to be viewed as abnormal (US EIA 2). While oil prices began rising in December 2012, its only been attributed to a new phenomenon in market behavior that usually characterizes the first half of every year. Oil prices push inflation rates a notch higher during the seasons characterized by the price surges.

Echoing the Federal Open Market Committee’s Report, 2011, Yelled affirms that the consumer inflation rates increased reflecting the high oil and gasoline prices that were experienced in the season (Yelled 1). This inflationary force is characterized by increased transportation costs, reduced discretionary spending as a result of high gas prices and higher freight charges that are Justified by increased fuel prices (Federal Reserve Districts 3). The surge in oil and gasoline prices has shown that consumers are at the receiving end since producers and manufacturers are known for trickling down the cost of energy to consumers.

Exploring the Energy Concern from a Demand-supply Perspective From an economic perspective, the price of a commodity is determined by the interaction between its demand and supply levels. When the demand exceeds supply, commodity prices are likely to rise unless there are government intervention policies such as price ceilings. The high prices of oil and gasoline in the American markets are attributable to many factors citing the demand and supply interactions of the oil and gasoline markets.

The US EIA views the price fluctuations as being predictably seasonal owing to the various activities that characterize the industry as seasons change (US EIA 1). For instance, the demand for fuel rises depending on Macro Economics – Oil and Gas By remorse reduction in prices. This is because the warm weathers are characterized by more drivers on the roads who push demand for fuel up. With the supply of oil stagnating during where fewer people need to drive based on poor road conditions and the possibility of holiday seasons.

The increase in crude oil has also been linked to the surging oil demand from the emerging economies, notably China. Yelled argues that the emerging markets of the world have considerably contributed to the pressure on the oil supplies thereby causing the prices to increase (Yelled 3). While most third world economies suffered he 2008 economic turmoil, their recovery has been faster compared to the recovery witnessed in developed nations. The emergence of China as a major oil consumer has increased the pressure on oil supplies opening a new target market.

Yelled argues that the rise of China has seen its oil demand contribute toward a 50% demand of the world’s total which explains increase in oil consumption in the last decade. Another factor that has contributed to the upward pressure on prices is the increased concern on production levels of oil in the oil producing regions citing the Middle East and Africa (Yelled 3). The impact of the falling international oil production implies that oil supply may not match the world oil demand, which results in an upward pressure on oil prices.

The US EIA indicates that the refineries’ maintenance procedures play a part in the soaring oil prices (US EIA 1). These maintenance procedures occur every time the demand for oil shifts from the low prices during the mentioned unfavorable conditions towards a peak. For instance, during winter season, the demand for fuel is relatively lower, which gives the refineries an incentive to switch to low production of oil and gasoline. The onset of warmer seasons prompts a shift back on production of the much demanded summer-grade blend during where certain production processes have to be halted (US EIA 1).

The production lags involved in the transition periods accompanied with higher costs when producing the summer-grade gasoline could account for the higher pump prices. Additional contributors to the price increase are high demand for gasoline coupled with skyrocketing crude oil prices (US EIA 1). The high demand for gasoline is attributed to the high number of drivers on the road during the summer and other energy intensive activities. The EIA report indicates that crude oil prices rose sharply between December 2012 and February 2013 with a barrel price increasing by an upward of $12 (US EIA 1).

Higher prices of crude oil are also linked to the low world supply of crude oil and increasing demand of the product from the emerging economies (Yelled 3). The extent to which the fluctuating oil prices affect the economy can be viewed from the consumers’ perspective or from the manufacturers’ perspective with indications that high oil prices put pressure on the consumption power that characterizes consumer trends (Yelled 13). Business entities are likely to stone vital investments due to market uncertainties posed by oil price price fluctuations.

Efforts to Improve Resource Allocations To resolve the economic problems revolving around the high oil and gasoline prices, efforts have been taken toward efficient resource allocation in the economy. Based on the analysis of issues that cause oil price increases, it is possible to enact increase due to a mismatch between demand and supply, more responsiveness from suppliers and refineries can achieve more stable prices. As the EIA report indicates, maintenance of refineries causes considerate oil shortage in the market, which nutrients toward increasing oil prices (US EIA 1).

This implies that with proper timing with regard to market forces, oil shortage can be avoided leading to stabilization of prices. Responding to the summer gasoline demands should also be a prompting factor to avoid seasonal price hikes. Domestic oil production needs to be encouraged through enactment of the sector’s expansionary policies. According to the 1992 Energy Policy Act, local oil production was set to receive a boost for it to become lucrative enough to attract investors (EIA 4).

The policy act aimed at tax deductions on processes that involved energy exploration in the country. By stepping up this initiative, the locally produced oil will help in offsetting a considerable proportion in national oil consumption. This will subsequently achieve price stability due to allocation efficiency. The oil and gasoline industry is required to invest in research and development to discover new methods at delivering necessary products to the market without causing unnecessary shortages.

Consistent with the policy act of 1992, the EIA emphasizes the need for adopting new energy sources to avoid overbalance on petroleum products (US EIA 4). The EIA argues that by adopting enable forms of energy, the country’s consumption of petroleum products could be cut leading to better sustainability of low oil prices. Possible Government Incentives to Lower Oil Prices Beyond effects of higher oil prices on the manufacturing sector, oil prices hurt consumers as they put pressure on their incomes.

This explains the expectation from consumers that the government should intervene in form of introduction of lowly priced energy sources or by enacting tax cuts on oil and gasoline. The feasibility of these incentives depends on the kind of policies the government is currently pursuing. Involvement of the government on this issue is limited by its other national and international commitments. There are other objectives related to energy consumption such as the government’s role at regulating national emission of greenhouse gases.

This is counteractive to the people’s expectations of the government’s intervention to lower oil prices. As US EIA reports, the government has been enacting policies aimed at reducing the use of petroleum products (US EIA 2). These policies can act to provide consumers with better energy forms thereby reducing their reliance on petroleum products. On the issue of enacting direct tax TTS on petroleum products, the government’s commitment to comply with environmental conservation regarding greenhouse gases will limit the viability of such a move.

The commitment by government to stabilize the economy based on certain policy implementations to curb inflation and unemployment issues cannot undo its other policies aimed at achieving a cleaner and healthier environment. This implies that the prospects of having a government incentive aimed at lowering oil prices is unlikely. Oil and gasoline prices may continue to be unstable given that the world demand for oil continues to rise. Prices are seen to be influenced by local seasonal changes, which mark different levels on demand for gasoline.

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