Business Economics Gm545 Essay

451 WordsApr 2, 20122 Pages
Exercise 1 – Everyone’s Gasoline Problem The fluctuating gasoline prices are closely related to fluctuating prices of crude oil. It represents 77% of gasoline price. Enclosed below is the gasoline price structure. For example there are other inputs that affect gasoline price like refining costs and profits, federal and state taxes, distribution and marketing. Moreover, the fluctuating petroleum prices are also impacted by demand and supply of the gasoline and economy in general. As the crude oil prices go up, so does the gasoline price in the retail environment. Although “U.S. motor gasoline consumption fell sharply between 2007 and 2011. In 2008, consumption fell by 300 thousand barrels per day from the previous year, as high retail gasoline prices that persisted through October 2008 and the recession reduced highway travel. Consumption flattened in 2009 and 2010, but then dropped by 240 thousand bares a day in 2011 as high gasoline prices contributed to the dampening of travel for most of the year.” (http://www.eia.gov/oog/info/twip/twip.asp) The latest projection is that gasoline consumption will fall by another 2% annually in 2012 and 2013 due to continues improvements in the average vehicle fleet fuel economy. People stopped driving and travelling as much as they used to. The population, economic growth, the unemployment rate and income are the other factors of decreasing gasoline consumption. But if we look at gasoline prices we will see that decrease in gasoline consumption does not affect the price that much. Enclosed below is a chart for the fluctuating gasoline prices in US over last two years. The average price of gasoline has increased since last year by 29 cents per gallon, which means gasoline is relatively inelastic product. “If gasoline prices rise too sharply, some consumers will curtail their driving. Still, it takes a fairly

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