Dramatic Fluctuations In Gasoline Prices example essay topic

According to an August 31, 2003, online article from the Kansas City Star, gasoline prices in the Midwest have historically been among the lowest in the nation (Everly). However, within the last month, we are now slightly above the national average, which, according to the article "This Week In Petroleum", rose by 12 cents per gallon between August 18 and August 25, 2003 to an average of $1.74 per gallon. Drive around the Kansas City Metropolitan area and one will encounter prices ranging from $1.49 per gallon at the Flying J station in Peculiar, Mo., to $1.79 per gallon at the BP station in Overland Park ("KCGasPrices. com"). So what causes the dramatic fluctuations in gasoline prices? The dramatic fluctuations in gasoline prices are a result of a highly competitive gasoline market, and according to the Energy Information Administration, the basic costs to produce and deliver gasoline to consumers encompass the cost and availability of crude oil, which is approximately 46% of the price; marketing and distribution costs, 12% of the price; refining costs and profits, 14%; and federal and state taxes, 28% ("A Primer"). Gasoline is shipped from refineries to retail stations by pipelines or trucks, and a number of price markups, which vary from region to region due to the formulations required to produce different grades of gasoline, may be added to the consumer's price along the way ("Gasoline Price").

Typically, when retail gasoline prices rise, even when crude oil prices are stable, it's primarily due to a large, seasonality demand for gasoline. In "Crude Oil and Petroleum Product Prices", prices fluctuate widely and are based on supply and demand conditions... Taxes and factors other than the cost of crude oil account for more than half of the price paid by the consumer for a gallon of motor gasoline". According to "This Week in Petroleum", the most recent increase has been caused by supply problems that "occurred at the same time the country experienced record demand, forcing many companies to secure additional sources of supply. With inventories already low, there was not enough gasoline available to fully replace lost refinery production and meet increased demand". Another factor in the rise of gasoline prices is station competition.

The Senate Committee on Government Affairs claimed in April 2002, that "many oil companies use zone pricing to charge different prices for gasoline to different station operators in order to confine price competition to the smallest area possible and to maximize their prices and revenues at each retail outlet". Additionally, for stations owned by major oil companies, it is the oil company that determines the price of the local station, and therefore benefits from higher prices and profit margins. SOLUTIONS In an August 28, 2002, issue of the Silicon Valley / San Jose Business Journal, the consumer group Foundation for Taxpayer and Consumer Rights suggested "the cheapest and easiest way for taxpayers to create a strategic reserve in order to avoid price spikes is to use existing pump capacity. Rather than drill in the Arctic, let's clean the pumps of the... higher-octane fuel that is not used". The group's report stated that stations offering regular, mid grade, and premium gasoline resulted in "under-utilization of existing storage tanks, many of which sit partially filled with slower selling high octane gasoline: ("Consumers"). The group further maintains that a single-grade program could eliminate or reduce the price by as much as 20-cents per gallon.

This solution meets our panel's criteria, since current gasoline grades must already meet environmental standards, taxes imposed remain the same, therefore shouldn't hinder a state's economy, and no changes would be needed in current vehicles. However, another solution may be using alternative fuels, such as ethanol. The Federal Trade Commission claims that reformulated, cleaner gasoline and alternative fuels "produce fewer tail pipe pollutants than conventional gasoline and diesel fuel. Using them could improve our air quality" (Consider").

Currently, ethanol, a liquid produced from grain or agricultural waste, usually is sold as a blend of 85 percent denatured ethanol and 15 percent gasoline. "Ethanol can be produced from cellulose feedstocks, or raw materials, such as corn stalks, rice straw, sugar cane, pulpwood,'s witchgrass, and municipal solid waste. Because of the variety of feedstocks that can be used, ethanol offers tremendous opportunities for new jobs and economic growth" ("Ethanol Market"). Aside from reducing the level of vehicle emissions, domestically produced alternative fuels could help reduce the trade deficit, create jobs, and promote economic activity ("Consider"). According to the American Coalition for Ethanol, "since the petroleum refining industry is running at near capacity, the ethanol industry helps extend our petroleum supply, thereby helping moderate fuel costs to consumers", and since ethanol is a high-octane blending component used by many gasoline marketers... ". it helps to keep this important class of trade viable and creates competition for the major oil companies", (Ethanol Information") thus allowing fuel prices to fall. Alternative fuels meet at least 2 of the panel's criteria: it is obviously safe for the environment, and it appears to actually boost a state's economy by creating jobs, and according to the American Coalition for Ethanol, "the economic activity attributable to the ethanol industry will generate $3.5 billion in additional income tax revenue over the next five years" ("Ethanol Information).

However, currently, not all vehicles are capable of running 85-percent ethanol blends. In the event car manufacturers side with the ethanol industry and build all future vehicles with the capabilities of running on ethanol, this alternative fuel choice will be the best solution to the problem of rising area fuel prices.