Supply and Demand of Gasoline Essay Example

Supply and Demand of Gasoline Essay The Organization of Petroleum Exporting Countries (OPEC) produces about 40% of the world’s crude oil. This huge share allows OPEC to influence the world’s oil prices by limiting its members’ supplies to the marketplace through the imposition of quota. However, despite this large share of reserves, the continuous fluctuation of prices of the world’s crude oil shows that OPEC’s control over world prices is limited by the other forces affecting the global supply and demand of oil and gasoline (Grant, et. Al.).The supply and demand of gasoline is affected by price controls and in the same way, price changes affect the supply and demand of gasoline. But other than the gasoline’s relationship with its price per se, there are underlying factors that affect the supply and demand of gasoline. The price of crude and the perceptions on the future conditions of the market, which are then dependent on geopolitical changes, growing demand, seasonal changes , lack of spare production capacity and low Alaskan production capacity, are two of the major factors (Gasoline, 2006).Since the supply of gasoline is dependent on the supply of crude, it is indirectly dependent on the factors which affect the supply and demand of crude. And these factors are interrelated in a manner which is not as simple as it is not linear. Crude is an international commodity and is affected by the interrelationship of many international supply and demand factors. Consequently, since the supply of gasoline is largely dependent on the supply of crude, the supply and demand of gasoline are also largely affected the interrelated factors affecting the supply and demand of crude.The supply of gasoline is also dependent on the processes involved in its production and marketing. The production of gasoline involves the finding, extracting and the transportation of crude oil which is further refined to produce gasoline. This is then distributed and marketed to the retaile rs and then to the consumers. This continuum of processes is called the chain of production and it connects an international network of producers, refiners, traders and consumers of petroleum products. Meaning, the market is composed of lots of participants, all involved in the facilitation of the movement of oil from production to marketing. And any unnatural movement in these processes could greatly affect gasoline’s supply and demand (Grant, et. Al., 2006). Any event that could cause sudden disruption in the refining process of gasoline, for example, could lower the supply and increase its price. Such event could best be exemplified by the hurricane Katrina. This calamity caused an immediate hike in gasoline prices with the threat of reduced supply caused by the destruction of many refineries (Supply and Demand in Gasoline, n.d.), and with the increased demand as a result of the community’s â€Å"panic-buying† (Schwartz, 2005).With the increased global econom ic growth, plus increase in the number of commodities demanding petroleum, it is said that gasoline prices started rising in 2003 when the demand for gasoline suddenly increased (Grant, et. Al., 2006). This event has also been equated to the sudden unforeseen growth in some countries’, particularly, China’s economy, increasing the global demand for gasoline. This, in itself, has the power to increase the global price for gasoline. If the simple economic law of supply and demand would be applied, the increase in the price of gasoline would balance the market by decreasing the demand which would in turn, decrease the price. But as it is said, there are other factors that are at play. The unanticipated increase in the world’s demand on gasoline affected the world’s spare oil reserves resulting in an unanticipated substantial decrease in the world’s spare production capacity from 5.6 million barrels in 2002 to about 2 million barrels in 2003 and threat ening the future global supply (Grant, et. Al., 2006). The estimated future global supply also in itself is a significant factor that could move the market for gasoline.Spots and futures contracts are included in the market for gasoline to permit the consumers and traders to insure themselves against the risks of fluctuating prices. The futures market provides the traders with information on the future conditions regarding the gasoline’s supply and demand, that is, an estimate of the future price of the commodity. The current price of gasoline could increase or decrease just based on this information this information is a tool, used by the traders to strategically position themselves in the market, that is, whether they would buy or sell their spots and futures contracts. Their decisions, as affected by the futures information could affect the actual conditions of the current and future supply and demand of gasoline and thus, determine the price of gasoline (Grant, et. Al., 2 006).The supply and demand for gasoline involve the interrelationship of many different factors and in determining the movement of such market; no variable should be left unconsidered. The economics of gasoline works not as a simple linear cause and effect reaction but a more dynamic and sometimes circular system where all effects, however simple it may appear are greatly dependent on its minute initial conditions.