Gasoline Prices Essay Example | Topics and Well Written Essays - 1500 words

Gasoline Prices - Essay Example Increased fuel prices forces American society to find alternative energy sources and motivates the government to invest more into research and development of the cars with less fuel consumption and improving efficiency of the refinery sector. Crude oil prices have the major impact on gasoline prices. Other factors include refinery capacity in the country, gasoline inventories maintained by refiners which is going downward, regulatory environment (national air quality standards), and the structure of the gasoline market. It is important to note that mergers lead to anticompetitive effects because more power is given to merged companies who are able to increase prices above competitive level. The first wave of mergers has started in 1990s in US when several competing with each other companies have merged. More than 2,500 mergers have occurred at that time - since 2000 only 8 mergers have occurred involving different market segments (exploration, production, and transportation) (Energy Markets: Factors Contributing to Higher Gasoline Prices, 1). Refining capacity in the United States is not expanding at the same rate as demand for the gasoline. The American average refinery capacity is 92 percent - as the result, there is no room to expand production (Energy Markets: Factors Contributing to Higher Gasoline Prices, 1). ... Experts attribute higher prices to the expending demand (particularly for the electricity production) while supply is not expanding at the same rate. The balance of demand and supply is especially affected if demand or supply changes unexpectedly. For example, the prices went up at the end of year 2005 when two hurricanes hit the Gulf Coast region (Natural Gas: Factors Affecting Prices and Potential Impacts on Consumers, 1). As it was noted above, the domestic refineries are already working at their full capacity and the fact that the gasoline is imported leads to the shortage of supply. According to market structure principles, the shortage of supply results in increased cost - people will buy gasoline despite of the price they pay. In 2004 the United States citizens have consumed approximately 20.5 million barrels per day of crude oil accounting for as much as 25 percent of global production. Half of this crude oil was used for the production of gasoline. Data from the Energy Information Administration indicate that the capacity of American refineries is approximately 16.5 million barrels per day. Even though the refineries are upgraded, the majority of them have been built over 25 years ago. By year 2020 the demand for gasoline is projected to increase by 20 percent and the country will not be able to satisfy the domestic demand. As Karen Matusic has noted, since May 2005 the demand for gasoline has increased by 3.3 percent while the price increased by 35 percent. From supply side, she continues, those refineries that has been destroyed by hurricanes are operating now and the capacity utilization rate rose to 91.7 percent (Matusic, 1). Despite of the increased capacity, the price for gasoline is not