Oil_&_Gas_Prices

Running head: Expository Essay - Oil and Gas Prices What Affects Oil and Gas Prices' While the US government and States continue to add tax to gasoline, rising gas prices continue to affect the American household. OPEC, Stock Traders, Federal, and local governments all have a hand in determining the prices the American population pays at the pumps. The rising price of fuel whether gasoline or diesel causes companies to downsize to meet projected profit margins forcing a trickledown effect causing Americans to use up their personal savings to survive the economic strains. Determining Crude Oil Prices A number of items contribute to or has an influence on the outcome of oil and gas prices. Oil price futures affect crude oil prices; with this, the Stock Market Trader is involved. Oil futures contracts, are an agreement to buy or sell crude oil at a specific date in the future at a specific price; this forecasts the value of oil into the future. According to Kimberly Amadeo (2009), "Oil future prices fluctuate daily, depending on what investors think the price of oil will be in the future, Traders spend all day every day researching their particular commodity. This means they are very good at it, so you can totally trust their estimation." Supply and demand also affects crude oil prices. Kimberly Amadeo states, "OPEC, Organization of the Petroleum Exporting Countries, is an organization of oil-producing countries that have power over most of the world's oil. In 1960, they formed an alliance to regulate the supply, and to some extent, the price of oil" (Amadeo, 2009, p. 1). She also has determined that, "OPEC's goal is to keep the price of oil at around $70 per barrel. If it is much higher, other countries would have the incentive to drill for new oil supplies." In her article titled Strategic Petroleum Reserves Amadeo states, "We also have our reserves; the U.S. Oil Reserves are the world's largest stockpile of emergency crude oil. The oil is stored in underground salt caverns on the coast of the Gulf of Mexico that can hold over 700 million barrels. The federally owned reserves can replace about two months worth of imports, should that ever become necessary." "The U.S. reserves are also used to discourage possible political threats from oil-producing nations" (Amadeo, 2009, p. 1). These reserves were tapped in 2005, after Hurricane Katrina devastated New Orleans, to increase our supply. Hurricane Katrina hit the Gulf Coast in late August 2005. This storm shut down many of the regions important oil producing facilities for over a week. Due to a 1.4 million barrel a day reduction in oil supply, a significant rise in fuel prices affected the American economy. Sixty Percent of the imported oil, which normally arrives through the Gulf ports, could not be delivered because the terminals were closed and pipelines and refineries were reporting substantial damages. To compensate for the loss, the Department of Energy agreed to release 30 million barrels of crude oil from the Strategic Petroleum Reserve. This oil was not given to the refineries; it was put up for sale to the oil companies. In the end, only 20.8 million barrels were sold. However, it still took until April 2008 to replenish the reserve back to the pre-Katrina level. "Affecting demand, our country uses 20% of the world's oil. Two-thirds of this is for transportation, this is for the reason that the United States has not developed the infrastructure for mass transit and is dependent upon imported oil" (Amadeo, 2009, p. 1). Federal and State Excise Tax Per the American Petroleum Institute (API) website (2009), "Nationwide average tax on gasoline is 47.3 cents per gallon as of July 2009. The federal tax on gasoline is 18.4 cents per gallon. The average state gasoline excise tax remained consistent at 18.5 cents per gallon. Other taxes add 10.4 cents per gallon to the average tax on gasoline. These other taxes include applicable sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees. Adding these taxes and fees to the state excise taxes results in an average state tax of 28.9 cents per gallon." An article in The New York Times, written by Kate Galbraith, showed that because of income shortfalls and cost of construction increasing annually, California, Illinois, Oregon, Massachusetts, are just a few states thinking about increasing gas taxes to help with the expense of road and bridge maintenance and repairs. Gas tax revenues supply half the funds to the state Dept of Transportation for road repair expense. The rest of the funds come from toll charges, vehicles registration fees, and vehicle inspection fees. However, due to the high cost of fuel, people drive less; therefore buy less gas, causing a budget deficit. Could this be considered another trickledown effect of high gas prices' Some States are rethinking the long-established gasoline tax; they are considering taxing us by the miles we drive our vehicle. This has been tested in Portland, Oregon, but has not been tried on a larger scale. OPEC claims price variation levels are due to the varying levels of taxation added to the crude oil prices by major countries (OPEC, 2009, p. 1). See the bar graph below illustrating 2008 variations regional wide. [pic] Distribution "Crude oil accounts for 55% of the price of Gasoline while distribution and taxes influence the remaining 45%" (Amadeo, 2009, How High Oil Prices Make High Gas Prices, Para. 1). The article from American Petroleum Institute titled Facts on Fuel explains, "Getting oil from the well to the refinery and from there to the service station requires a complex transportation and storage system. Millions of barrels of oil are transported every day in tankers, pipelines, and trucks. Most refined gasoline travels via pipeline to large storage tanks that feed into local distribution centers around the country. The final leg of the journey, from the terminal to your local service station, is delivered by truck." According to the Energy Information Administration (EIA) (2009), "The top five crude oil-producing countries in the world are Saudi Arabia, Russia, The United States, Iran, and China. Over one-fourth of the crude oil produced in the U.S. is produced offshore in the Gulf of Mexico. The top crude oil-producing States are Texas, Alaska, California, Louisiana, and Oklahoma." How do Rising Gas Prices Affect American Households' The increasing price of gasoline affects most households in the United States; there is no one left unaffected by the price of gas at the pump. The price of fuel causes the cost of operations to escalate causing businesses to experience higher production costs, while demand for their merchandise is lower, causing them to downsize to keep their profit margins at the same level of comfort. "Individuals, too, may begin to adjust their work choices as longer commutes make working outside the home less beneficial. These two effects reduce overall employment" (Campbell, 2008, p. 3). Analysts at The Heritage Foundation created the table below reflecting how rising gas prices will affect households. [pic] If prices continue to rise at an accelerated pace over the course of a year, this will cause loss of jobs and a decrease of deposable personal income and personal consumption expenditures. Personal savings will be depleted to help pay the higher cost of living (Campbell, 2008). In conclusion, with OPEC possessing the majority of control over the price of crude oil and keeping the price at or around $70 per barrel, the American population will continue to struggle financially to meet daily expenses. Companies will continue to maintain the existing high prices on their products, even increasing their prices if the crude oil price inflates, causing more strain on the economy. From the oil fields to our wallets, gasoline is a necessity, but at what price' References Amadeo, K. (2009) Oil and Gas Prices - How Does Oil Affect Gas Prices, Retrieved December 2, 2009, from About.com: http://useconomy.about.com/od/supply/p/oil_gas_prices.htm Amadeo, K. (2009) What Gas Prices Are High, Retrieved December 2, 2009, from About.com: http://useconomy.about.com/od/commoditiesmarketfaq/p/high_gas_prices.htm Amadeo, K. (2009) What Are Commodities Futures, Retrieved December 2, 2009, from About.com: http://useconomy.about.com/od/commoditiesmarketfaq/f/Futures.htm'p=1 Amadeo, K. (2009) Strategic Petroleum Reserves, Retrieved December 6, 2009, from About.com: http://useconomy.about.com/od/glossary/g/Oil_reserves.htm American Petroleum Institute. (2009). Gasoline Taxes. Retrieved December 6, 2009, from http://www.api.org/statistics/fueltaxes/upload/October_2009_gasoline_and_diesel_summ ary_pages.pdf American Petroleum Institute. (2009). Facts on Fuel - Gasoline. Retrieved December 6, 2009, from http://www.api.org/aboutoilgas/factsfuel/facts-gasoline.cfm Campbell, K. (2008) How Rising Gas Prices Hurt American Households. Retrieved December 2, 2009, from The Heritage Foundation: http://www.heritage.org/Research/Economy/bg2162.cfm Energy Information Administration. (2009) Where Our Oil Comes From - Basics. Retrieved December 6, 2009, from http://tonto.eia.doe.gov/energyexplained/print.cfm'page=oil_where Galbraith, K. (2009) Some States in a Pinch May Raise Gasoline Tax. Retrieved January 2, 2010, from The New York Times: http://www.nytimes.com/2009/01/14/business/economy/14gastax.html'_r=1 Nwazota, K. (2005) Hurricane Katrina Underscores Tenuous State of U.S. Oil Refining Industry. Retrieved December 29, 2009, from http://www.pbs.org/newshour/bb/weather/july-dec05/katrina/oil_background.html OPEC. (2009) OPEC Facts and figures. Retrieved January 9, 2010, from http://www.opec.org/home/PowerPoint/Taxation/taxation.htm U.S. Department of Energy. (2009) Strategic Petroleum Reserve - Quick Facts and Frequently Asked Questions. Retrieved December 29, 2009, from http://www.fossil.energy.gov/programs/reserves/spr/spr-facts.html