Rising Gasoline Price and its Effect on the US Economy

Gas prices have been steadily rising for the past six years. According to the U.S. Department of Energy, the average retail price of gasoline in the United States in March, 1999 was $1.05 per gallon and has risen to $2.50 per gallon in August, 2005. Rising gasoline prices are having a negative impact on the economy. “Higher energy prices were responsible for a jump in American inflation. Consumer prices rose by 0.7% in January, leaving the 4% higher than a year earlier.”

Rising gasoline prices affect both individuals and businesses, but small businesses are being hit the hardest. Small businesses generally do not have a large financial reserve to cover rapidly increasing costs such as gasoline. Small businesses with delivery services have been the hardest hit segment. Gasoline costs are a major expense for business like florists, moving companies, and pizza delivery services. These businesses take a double hit due to the rising gasoline costs. Their delivery expense has risen and distributors are charging more for their products because their delivery costs are higher as well.

The moving industry has suffered a loss in profits even though they have added a fuel surcharge to their costs. More moving companies went out of business in 2004 than in any of the previous ten years. This is believed to be directly related to the escalating cost of gasoline. Florists have been forced to increase their delivery charge and pizza delivery services have increased the cost of pizza. Small businesses are forced to absorb much of these costs for fear of losing their customers, putting them at risk of bankruptcy. Large corporations deal mostly with other businesses and are more able to absorb the rising costs. They also have the luxury of passing more of the increase on to the businesses they deal with.

The Federal Trade Commission released a comprehensive report on gasoline prices on July 5, 2005. The report, “Gasoline Price Changes: the Dynamic of Supply, Demand, and Competition, analyzes the many factors that influence fluctuations in the prices that U.S. consumers pay for gasoline at their local gas stations.” According to the report, the cost of crude oil; the increase of national and international demand for gasoline; and federal, state, and local regulations all influence the price consumers pay at the pump. One of the conclusions of the report is that changes in the price of crude oil have ...

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The FTC’s Report provides detailed information outlining the key factors that lead to spikes and changes in gasoline prices. “Worldwide supply, demand, and competition for crude oil are the most important factors in the national average price of gasoline in the United States. Since 1973, according to the Report, production decisions by OPEC have been a significant factor in the prices that refiners pay for crude oil.” During the past two decades, the United States’ demand for crude oil has continued to grow and this constant increase in demand has lead to higher prices at the pump.

Demand plays a major role in the price of gasoline. “High demand is led by the United States market, the source of an increasing percentage of the world’s demand for petroleum. The U.S. economy currently accounts for one-quarter of all demand.” China leads the third world nations in crude oil demand. China is developing a car culture similar to western countries and their manufacturing industries are experiencing rapid growth as well, adding significantly to world demand.

Supply is also a key player in determining gasoline prices. There is fear that oil suppliers will be reduced in future years. This fear is based on many existing and emerging world circumstances. The growing turbulence in the Middle East is one of the most critical factors. The Middle East is the world’s largest oil producing region and turbulence in this area threatens the world’s oil supply. Other factors include the war in Iraq, Iran’s emerging nuclear program, and the instability stirring in Saudi Arabia after the death of King Fahd. All these factors could lead to a dramatic decrease in the supply of oil.

The political turmoil in Iran and Nigeria, two key exporters may possibly send crude oil back toward the $70 plus per barrel high of last September following Hurricane Katrina. The most recent surge in price was caused by the combination of a more than 200,000 barrel a day cut in production in Nigeria along with a fear of a production disruption on a much greater scale in Iran. The world could cope with the daily loss of 200,000 barrels of crude but the loss of Iranian exports would be a very serious matter. “Frankly, we couldn’t cope with the loss of Iranian oil,” says Leo Drollas, deputy director of the Center for Global Energy Studies, a London-based think tank. In simple terms, the world’s spare capacity is about 2 million barrels per day, nearly all of it in Saudi Arabia. The loss of Iran’s 2.5 million barrels in daily exports would breach that limit in one shot, sending prices who knows where.”

Gasoline prices reached an all time high during the first week of September, 2005 in the aftermath of Hurricane Katrina. The previous high price of a gallon of gasoline in the United States was $2.38 in March, 1981. The average retail price in September, 2005 was $3.04 per gallon. “Hurricane Katrina crippled the supply-flow from off-shore rigs in the Gulf Coast, the largest source of oil for the domestic U.S. market. Short-term shutdowns because of power

outages knocked out two major on-shore pipelines, and at least 10 percent of the nation’s refining capacity was not operating in the wake of the storm.” Natural disasters caused by turbulent weather conditions are just one more element contributing to the rise of gasoline prices.

Many factors contribute to rising oil prices. Political instability is the norm in the major oil producing nations. This unrest has existed for many years with no end in sight. The recent threat of terrorism could have a disastrous affect on the economy and oil supplies at any time. In addition, the United States oil supply is threatened by natural disasters caused by unstable weather conditions. And, demand for crude oil keeps increasing with no end in sight. While many believe price gouging is at least partially responsible for rising gasoline prices, research indicates it is an incredibly small piece of the pricing puzzle. The price of crude oil reflected in the rising price of gasoline is determined by market forces of supply and demand.

The future will continue to see fluctuations and increases in the price of crude oil and gasoline. Many factors contribute to this existing pattern. We live in a world of increased demand by industry and individual consumers. Society is unwilling to make the necessary sacrifices needed to help stabilize crude oil demands. Americans continue to drive gas guzzling SUV’s and avoid car pooling like the plaque. We are a spoiled society willing to pay the price for our desired life style.

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Oil price increases of 2004 and 2005. Wikipedia. . Retrieved March 13, 2006 from the World Wide Web.

Stanley, Reed. Forget Cheaper Oil in 2006? (1/19/2006). . Retrieved March 4, 2006 from the World Wide Web.