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Fundamentals of Managerial Economics

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Karl Brinkhoff MGT.360 Final Paper The Rising Price of Gasoline: What Factors Are Involved With This Economic Issue? The year 2004 has seen a steady climb in the price of gasoline. From January of 2004 to May of 2004 there has been a jump of approximately .50 cents a gallon (Energy Information Administration). For many Americans high gas prices have been a hot issue with them, and there seems to be no rhyme or reason to these fluctuations. With the continued popularity of the sport-utility vehicle and the high volume of gasoline it requires, the issue of high gas prices doesn't seem to be going away anytime soon. Many factors go into determining the price of gasoline. This paper will explore the various factors involved to determine the price of gas and attempt to gain a better understanding on how it arrives at its decision. The gasoline industry is an oligopoly. In Mark Hirschey's book called Fundamentals of Managerial Economics an oligopoly is defined as, "A market structure characterized by few sellers and interdependent price/ output decisions". This market structure only allows a few large rivals to produce the majority of the industry's output (404). The oligopoly controlling the gasoline industry is the Organization of the Petroleum Exporting Countries (OPEC). OPEC consists of 11 oil producing countries: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, United Arab Emirates, Algeria, and Nigeria (OPEC.org). ...read more.


The argument is, isn't 95% full, full enough? Why not put those barrels of oil into the marketplace to help drive down the cost of gasoline? Especially now with the summer driving season here. In addition to many oil producing states, the United States has potential for even more oil production in The Artic National Wildlife Refuge in northern Alaska. The Artic National Wildlife Refuge (ANWR) is a section of land in northern Alaska that was created in 1960. Its size is about 19 million acres or about the size of South Carolina. Within the ANWR is the 1002 Area. The 1002 Area is about 1.5 million acres of land. This area has a great potential for oil and gas discovery because it is an extension of already productive lands in Prudhoe Bay to the East and the Mackenzie Delta for the Canadians to the West. Congressional approval would be required to open up the lands for exploration and development. The Department of Interior in 1987 recommended opening the area for exploration and development. In 1995 congress approved the 1002 area to be developed but it was later vetoed by the President (www.eia.doe.gov). Opponents to the development of the 1002 Area say it would destroy the ecosystem within the ANWR. No one knows for sure how much oil is under the ANWR but a study done by the United States Geological Survey suggests that there is about 7 billions barrels of oil in just the 1002 Area alone (How Gas Prices Work). ...read more.


Like any other consumer product there is a supply chain and groups that set the prices all of who get a percentage of the profits. At the website www.howstuffworks.com there is a pie diagram in the shape of a gas pump and it breaks down where your money goes: Crude oil-43%, refining costs and profits-13%, Distribution and Marketing costs and profits-13% and the second largest slice of the pie is taxes-31% (How Gas Prices Work). Government regulation in the gasoline industry comes in the form of taxes. As illustrated above taxes account for 31% of the cost of gasoline. The federal government imposes a tax of 18.4 cents a gallon. In addition to a federal tax there is a state tax. Taxes vary from state to state. According to the website clevelandgasprices.com the Ohio tax is listed at 24 cents a gallon but has since gone up. There are many factors that are involved when determining the price of gasoline. Because of the nature of an oligopoly OPEC tends to dominate the oil industry but the United States still has other sources for oil. Determinants of supply and demand will also be major factors when determining the price of gasoline. Government regulations in the form of taxes are not going away any time soon with a recent tax hike here in Ohio. In fact gas prices for the foreseeable future look to be high. With the fight against terrorism and instability in Iraq OPEC's output seems to be on shaky ground as long as there is continued conflict in the Middle Eastern world. ...read more.

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