High Pump Prices: Oil Demand And Supply Factors

High Pump Prices: Oil Demand and Supply Factors

Gasoline is the bloodline that keeps our country moving. We are all affected by the rising gas prices in today's economy. Numerous factors can influence the price of gas at the pump. The United States consumes approximately on an average of 20 million barrels of oil per day, from which, 45 percent is used for motor gasoline. This high demand usually translates into higher gasoline prices, although that's not always the case. Price increases generally occur when the world crude-oil market limits their production.

United States depends heavily on foreign oil supplies. The largest entity impacting the world's oil supplies is the Organization of the Petroleum Exporting Countries (OPEC) which constitutes of eleven nations. OPEC is responsible for 40 percent of the world's oil production and hold two-thirds of the world's oil reserves. When OPEC wants to raise the gas prices it simply reduces the production. The short supply and the possibility of future reductions cause the prices to jump up. Several other countries including the United States, also contribute to the world's crude-oil supplies. OPEC monitors the production of these countries and adjusts its production to maintain the desired price.

The price of gas does not exclusively depend on the price of crude oil however; it does take the biggest portion of the cost. Refining of crude oil, distribution, taxes and station markups also play key role in building gasoline prices.

High prices serve as a symbol of a scarce resource. From the Law of demand we know an increase in the price of gasoline will generally decrease demand for gas. Elasticity is the measure to determine the change in demand due the change in price. (TCO 2 Law of Demand)

Price elasticity of demand is the percentage change in demand caused by a one percent change in price. It often predicts that a one percent increase in the price of a product will result in a two percent increase in quantity demanded. When demand is responsive to price, it is elastic. (TCO2 Elasticity)

Gasoline prices however are relatively in elastic, when prices change; there is fairly little change in the quantity demanded. This is why, when the world supply of petroleum changes, a large change in price is usually needed to bring supply and demand into balance.

Another factor of high gasoline prices is the tax buyers are being charged. Tax on goods raises the price. When demand is inelastic the buyer bears the entire tax burden. A decrease in production of crude oil results in lower supply. Tax is increased due to a decrease in supply.

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