Course Project 1

Exercise 1

Answer 1:

In the United States millions of barrels of gasoline are being used on daily basis. Gasoline prices fluctuate from more than $4 per gallon in some areas to less than $2 in past recent years (Nationwide, 2012). Rapid fluctuations in gasoline prices can be ascribed through demand and supply, expenditure in refining crude oil into gasoline and market speculation. These factors clearly explain why the gasoline prices vary significantly in a short time. Rise in supply leads to fall in prices and vice versa. Today, emerging economies around the globe have raised the requirement for crude oil while supply remaining comparatively constant. Market speculators consider oil as a commodity and trade it as per the volatility in their prices. They buy and sell 'paper' barrels of gasoline. These speculators earn significant profits through selling their contracts at increased prices bought earlier at cheaper rates. Many of us think that gas companies set the prices for gasoline while it is a big misconception as companies own only 5% of the U.S. stations; their control over the price at the pumps is minimal (Nationwide, 2012). Gas stations earn only 23 cents per gallon regardless of prices of gasoline per gallon. Furthermore, many stations contract to sell gas at a preset price which yields just a few cents on a dollar. When the prices of gasoline rises, station owners feel nip as the sales on their profitable convenience stores also falls. Rapid industrialization and economic development in Asia has been found as one of the major contributors to rising oil prices. For the last two years, India and China recorded 70% rise in energy requirement and certainly the World's energy requirement would rise 55% by 2030, (Mouawad and Werdigier, 2007).

The Organization of Petroleum Exporting Countries (OPEC) sets the price per barrel of gasoline based on its production analysis. This determination of price significantly influences the cost of gasoline worldwide. Economically, rise in demand leads to rise in prices of consumer products, the same results in the case of gasoline. The final price of gasoline is determined through extensive and comprehensive factors i.e. from local politics in emergent nations to a natural catastrophe in the state nearby. Moreover, some other factors play their role as well.

Anything that interrupts the flow in petroleum distribution may also cause its prices to rise, such as a natural calamity like Hurricane Katrina or political instabilities in major oil producing countries like Iraq, Nigeria and Venezuela. Oil is being traded in U.S. dollars around the globe, when the value of dollar declines as compared to other key currencies, OPEC earns less per barrel. In order to reimburse its cost price per barrel is raised resulting price hike in gasoline.

Volatility in gasoline prices are the result of various factors such as supply of and demand for gasoline, market speculation and rising cost of cleansing crude oil into gasoline. Many of them are unpredictable such as inconsistent government policies, natural calamities and rising international ...