What causes gasoline prices to rise (and fall)?
Most prices fluctuate over time. Gasoline is no different as this chart indicates. The chart distinguishes between the nominal price of gasoline and the real (or, inflation adjusted) price. Our economic models are primarily designed to explain changes in real prices. From what you've read in Chapter 3 about supply and demand, what do you think are the main factors contributing to the rising real price of gasoline? Do you think the real price of gasoline is destined to rise forever?
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gas prices,
nominal and real prices
3 comments:
I think the major factors that contribute to changes in gasoline prices include the changes in crude oil prices and regulations that affect the price of gasoline. Crude oil prices are affected by the market supply and demand. The growing worldwide demand for oil continues to make the demand curve shift to the right, which leads to an increase in the crude oil price. The government also has an ability to affect the gasoline price. For example, the implementation of an environmental law will increase the gasoline price significantly.
I think that a major factor is supply. The demand for gasoline is always there. The supply side has two factors. Either it is a shortage in crude, or a kink in the weak refining infrastructure. Post-Katrina refining capacity dropped for a very long time, but it rebounded slightly. Most of if not all U.S. refineries are located in the Gulf of Mexico. This is why refining capacity can decrease very quickly if some disaster/failure of equipment happens. I heard recently that the refineries actually could not keep up with the amount of demand. The crude supply was there, but the refining capacity was not. Over the years, companies have built fewer and fewer refineries even though demand has increased. Instead, they have worked on becoming more efficient using less refineries. Maybe it is time to build another.
Indexation of gasoline prices shows us that although the nominal price of gas is higher than ever, the real price has not yet exceeded the spike in the 1980's...but perhaps some of the inflation that has occurred in the U.S. dollar is due to the rise in gasoline? As the article told us, many other things are affected by the price of oil, especially for items that must be shipped. Chapter 3 shows us that as long as the demand for gasoline exceeds the supply, the prices will continue to rise.
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