Everyone's Gasoline Problem
1.Everyone’s Gasoline Problem. We are all familiar with fluctuating prices of gasoline at the pump. Why does this happen? Research the recent history of gasoline pricing in your area, and attempt to relate any fluctuations you observe to documented supply and demand factors, as outlined in our book. Be sure to cite any references used. The price of gasoline at the consumer level is the result of a combination of factors: the price of one of the largest bulk commodities (transferable goods), the crude oil and the cost of producing and marketing gasoline affect the fluctuation in gas prices. Billions of people around the world rely on the crude oil for transportation; therefore, the value is influenced by its utility, supply and demand (market
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price). Crude oil prices are determined by worldwide supply and demand, with significant is influenced by the Oil Producing and Exporting Countries (OPEC)[1]. This organization determines how much oil to produce and sell to other countries. The more crude oil produced and released, the lower the price. There has been an unexpected growth in China, India and other fast developing nations. These nations had a tremendous increase in the people utilizing automobiles; therefore, their demand for crude oil has a strong impact in the gas price in those parts of the world. Seasonal changes has a serious impact too because during the summer and holiday seasons the gas price increase due to increased travel volume. As an example, the “American gas demand increases by 5% in the summer season, resulting in higher gas prices during these times[1].” The gasoline price in US is subject to frequent fluctuations.
For example, if we consider the gasoline prices during 2007-2011, we can see that, in 2007, the gasoline price was $2.9/gallon. In 2008, the price went up to $4.40 /gallon, which was a 51% increase in gasoline price from year one. Then during 2009the gasoline price went down to$3.00/gallon, representing a 31% decline in gasoline price. In 2010, the gasoline price increased to $3.20/gallon, and there was a 6% increase during February 2011 to March 2011, leading to 11% fluctuation in the price. From 2011 through 2012 the price went up from $4.20 to $4.35, not a big significant increase, and from this point to April 2013 there was a decrease to $3.90[2, 3], which has been helpful for the economy for the past …show more content…
months. Oil prices have drastically fluctuated over years and are at an all-time high, which results in many economic challenges.
Therefore, the relationship between demand and supply determines the prices of gasoline. When reduction in supply occurs while demand rises, prices increase quickly. However, prices decrease when the opposite occurs. When prices are too high, the result is surpluses that drag prices back down to their equilibrium price for oil. When prices are too low, the result is a shortage of oil. Oil occupies about 40% of total consumption of global energy which expresses how dependent on oil people are and the extreme need to maintain a
supply.
14. Assume initially that the demand and supply for premium coffees (one-pound bags) are in equilibrium. Now assume Starbucks introduces the world to premium blends, and so demand rises substantially. Describe what will happen in this market as it moves to a new equilibrium. If a hard freeze eliminates Brazil’s premium coffee crop, what will happen to the price of premium coffee? Assuming that the demand and the supply for the premium coffees are in equilibrium, the price will be at a constant, without significant pressure from the market. For example, if Starbucks introduced to the world the premium blends, I understand that this would cause a positive shift in the demand curve. Because demand increased and the supplies will remains unchanged, this will leads to a higher equilibrium in the price and for a higher quantity. When the prices increase, the market then will move to a new equilibrium. This will generally produce higher wages and, therefore, business will try to have more advances and investments in technology and infrastructure, leading to greater competition. The investment in more efficient production and supply chain management/logistics (i.e. cost leadership), or more investment in a better product that stands out in the market (i.e. product differentiation) will dramatically help the business. In the long, run success will also be dependent on the capabilities of the entire supply chain to keep up with demand; as production become more efficient and competition becomes greater, supply will increase and cause prices to settle back down. If a change in supply occurs, an impact in the long term equilibrium will occur. Let’s look at it this way: if the hard freeze eliminate the Brazil’s premium coffee crop, a negative shift in the supply curve will occur. Lets’ now assume that the demand remains constant, and then a negative shift in the supply curve will cause the quantity to decrease and an equilibrium price increase.
”According to the United States Department of Agriculture, the Brazilian coffee production for 2013-2014 decreased in 5% after the Brazilian Institute of Geography and Statistics (IBGE) released its March 2013 coffee production forecast a 4 percent drop compared to 2012[4].” The higher coffee prices and supply in 2012 led to lower domestic prices both in the local currency, the real, as well as in U.S. dollars. This devaluation of the real also contributes to lower coffee prices in U.S. dollars. Understanding the impact of problems along the supply chain and how the changes in supply will impact prices in the market, allows real world investors to make predictions of price in the future. When making strategic decisions, it’s important for any business to be knowledgeable of the supply chain in order to be aware of the curve.
15. In late 2006 and early 2007, orange crops in Florida were smaller than expected, and the crop in California was put in a deep freeze by an Arctic cold front. As a result, the production of oranges was severely reduced. In addition, in early 2007, President George W. Bush called for the United States to reduce its gasoline consumption by 20% in the next decade. He proposed an increase in ethanol produced from corn and the stalks and leaves from corn and other grasses. What is the likely impact of these two events on food prices in the United States?
The Orange crops were ruined, which will lead to a decrease in oranges accessible for consumption. With fewer oranges available the supply will have a contrast on the curve. When less quantity is available of an item for sell , the price will go higher; therefore; the oranges and any product derived from oranges will become more expensive because the impact of the price will the depend of the bulk: the oranges.
If a greater quantity of the corn and the grasses is utilized, the demand will increase. The corn and the grass take more than 6 months to grow and cultivate; however, the demand for the corn and grasses will be higher than the time to produce it; therefore, the price would increase to contract demand and ensure demand and supply remain in equilibrium. In other hand, since the production and supply of those mentioned before are not as fast as they consumption this will lead in a price increase until the next production becomes available and then the supply will increase and the price will decrease. This type of gambling with the supply will lead and help the market to take advantage of the situation.
Now if we look at both cases, we can observe that in both of them the price will increase, but it will be temporarily because the situation leading to this unstable situation is what is happening with the climate. Therefore, it will be temporarily since the supply of grasses and oranges possibly increase for next season if there is no interference.
The decision of cutting the gasoline consumption by 20% and then increasing the ethanol production from the corn and other biomaterials will and has increased the price of foods containing corn products in the United States as demand for corn and cost of production has increased.“Corn is the primary U.S. feed grain, accounting for more than 90 percent of total feed grain production and use[5].” As per USDA Economic Research 2013,(4)“Strong demand for ethanol production has resulted in higher corn prices and has provided incentives to increase corn acreage.” The corn prices have remained high since ethanol production has increased and also the amount of corn used for feed. The supply has been compromised with the high demand for corn and it derivates therefore the price will increase until the supply of the corn fulfill the demand.
References:
1. Why do gasoline prices fluctuate? 2006 [cited 2013 7/19]; Available from: http://www.wsaw.com/unclassified/1685611.html.
2. Forbes, J.B. FAQS: Gas Prices. 2013 [cited 2013 7/19]; Available from: http://www.house.gov/forbes/newsroom/editorials/2008/gaspricesprimer.htm.
3. Historical Price Charts. [cited 2013 7/19]; Available from: http://gasbuddy.com/gb_retail_price_chart.aspx.
4. Barros, S. Brazil Coffe Annual. 2013 [cited 2013 7/19]; Available from: http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Coffee%20Annual_Sao%20Paulo%20ATO_Brazil_5-13-2013.pdf.
5. Economic Research Service: Corn. 2013 [cited 2013 7/19]; Available from: http://www.ers.usda.gov/topics/crops/corn.aspx.
price). Crude oil prices are determined by worldwide supply and demand, with significant is influenced by the Oil Producing and Exporting Countries (OPEC)[1]. This organization determines how much oil to produce and sell to other countries. The more crude oil produced and released, the lower the price. There has been an unexpected growth in China, India and other fast developing nations. These nations had a tremendous increase in the people utilizing automobiles; therefore, their demand for crude oil has a strong impact in the gas price in those parts of the world. Seasonal changes has a serious impact too because during the summer and holiday seasons the gas price increase due to increased travel volume. As an example, the “American gas demand increases by 5% in the summer season, resulting in higher gas prices during these times[1].” The gasoline price in US is subject to frequent fluctuations.
For example, if we consider the gasoline prices during 2007-2011, we can see that, in 2007, the gasoline price was $2.9/gallon. In 2008, the price went up to $4.40 /gallon, which was a 51% increase in gasoline price from year one. Then during 2009the gasoline price went down to$3.00/gallon, representing a 31% decline in gasoline price. In 2010, the gasoline price increased to $3.20/gallon, and there was a 6% increase during February 2011 to March 2011, leading to 11% fluctuation in the price. From 2011 through 2012 the price went up from $4.20 to $4.35, not a big significant increase, and from this point to April 2013 there was a decrease to $3.90[2, 3], which has been helpful for the economy for the past …show more content…
months. Oil prices have drastically fluctuated over years and are at an all-time high, which results in many economic challenges.
Therefore, the relationship between demand and supply determines the prices of gasoline. When reduction in supply occurs while demand rises, prices increase quickly. However, prices decrease when the opposite occurs. When prices are too high, the result is surpluses that drag prices back down to their equilibrium price for oil. When prices are too low, the result is a shortage of oil. Oil occupies about 40% of total consumption of global energy which expresses how dependent on oil people are and the extreme need to maintain a
supply.
14. Assume initially that the demand and supply for premium coffees (one-pound bags) are in equilibrium. Now assume Starbucks introduces the world to premium blends, and so demand rises substantially. Describe what will happen in this market as it moves to a new equilibrium. If a hard freeze eliminates Brazil’s premium coffee crop, what will happen to the price of premium coffee? Assuming that the demand and the supply for the premium coffees are in equilibrium, the price will be at a constant, without significant pressure from the market. For example, if Starbucks introduced to the world the premium blends, I understand that this would cause a positive shift in the demand curve. Because demand increased and the supplies will remains unchanged, this will leads to a higher equilibrium in the price and for a higher quantity. When the prices increase, the market then will move to a new equilibrium. This will generally produce higher wages and, therefore, business will try to have more advances and investments in technology and infrastructure, leading to greater competition. The investment in more efficient production and supply chain management/logistics (i.e. cost leadership), or more investment in a better product that stands out in the market (i.e. product differentiation) will dramatically help the business. In the long, run success will also be dependent on the capabilities of the entire supply chain to keep up with demand; as production become more efficient and competition becomes greater, supply will increase and cause prices to settle back down. If a change in supply occurs, an impact in the long term equilibrium will occur. Let’s look at it this way: if the hard freeze eliminate the Brazil’s premium coffee crop, a negative shift in the supply curve will occur. Lets’ now assume that the demand remains constant, and then a negative shift in the supply curve will cause the quantity to decrease and an equilibrium price increase.
”According to the United States Department of Agriculture, the Brazilian coffee production for 2013-2014 decreased in 5% after the Brazilian Institute of Geography and Statistics (IBGE) released its March 2013 coffee production forecast a 4 percent drop compared to 2012[4].” The higher coffee prices and supply in 2012 led to lower domestic prices both in the local currency, the real, as well as in U.S. dollars. This devaluation of the real also contributes to lower coffee prices in U.S. dollars. Understanding the impact of problems along the supply chain and how the changes in supply will impact prices in the market, allows real world investors to make predictions of price in the future. When making strategic decisions, it’s important for any business to be knowledgeable of the supply chain in order to be aware of the curve.
15. In late 2006 and early 2007, orange crops in Florida were smaller than expected, and the crop in California was put in a deep freeze by an Arctic cold front. As a result, the production of oranges was severely reduced. In addition, in early 2007, President George W. Bush called for the United States to reduce its gasoline consumption by 20% in the next decade. He proposed an increase in ethanol produced from corn and the stalks and leaves from corn and other grasses. What is the likely impact of these two events on food prices in the United States?
The Orange crops were ruined, which will lead to a decrease in oranges accessible for consumption. With fewer oranges available the supply will have a contrast on the curve. When less quantity is available of an item for sell , the price will go higher; therefore; the oranges and any product derived from oranges will become more expensive because the impact of the price will the depend of the bulk: the oranges.
If a greater quantity of the corn and the grasses is utilized, the demand will increase. The corn and the grass take more than 6 months to grow and cultivate; however, the demand for the corn and grasses will be higher than the time to produce it; therefore, the price would increase to contract demand and ensure demand and supply remain in equilibrium. In other hand, since the production and supply of those mentioned before are not as fast as they consumption this will lead in a price increase until the next production becomes available and then the supply will increase and the price will decrease. This type of gambling with the supply will lead and help the market to take advantage of the situation.
Now if we look at both cases, we can observe that in both of them the price will increase, but it will be temporarily because the situation leading to this unstable situation is what is happening with the climate. Therefore, it will be temporarily since the supply of grasses and oranges possibly increase for next season if there is no interference.
The decision of cutting the gasoline consumption by 20% and then increasing the ethanol production from the corn and other biomaterials will and has increased the price of foods containing corn products in the United States as demand for corn and cost of production has increased.“Corn is the primary U.S. feed grain, accounting for more than 90 percent of total feed grain production and use[5].” As per USDA Economic Research 2013,(4)“Strong demand for ethanol production has resulted in higher corn prices and has provided incentives to increase corn acreage.” The corn prices have remained high since ethanol production has increased and also the amount of corn used for feed. The supply has been compromised with the high demand for corn and it derivates therefore the price will increase until the supply of the corn fulfill the demand.
References:
1. Why do gasoline prices fluctuate? 2006 [cited 2013 7/19]; Available from: http://www.wsaw.com/unclassified/1685611.html.
2. Forbes, J.B. FAQS: Gas Prices. 2013 [cited 2013 7/19]; Available from: http://www.house.gov/forbes/newsroom/editorials/2008/gaspricesprimer.htm.
3. Historical Price Charts. [cited 2013 7/19]; Available from: http://gasbuddy.com/gb_retail_price_chart.aspx.
4. Barros, S. Brazil Coffe Annual. 2013 [cited 2013 7/19]; Available from: http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Coffee%20Annual_Sao%20Paulo%20ATO_Brazil_5-13-2013.pdf.
5. Economic Research Service: Corn. 2013 [cited 2013 7/19]; Available from: http://www.ers.usda.gov/topics/crops/corn.aspx.