Free Essay Example on Demand and Supply of Gasoline

Gasoline has been a major product with a continuous demand since time immemorial. Nevertheless, an article by the Bloomberg news organization indicates that gasoline supplies rose at a record pace, but the demand declined substantially in January 2016. It was clear that the profit margins of the gasoline dealers are consequently falling. In the year 2016, inventories hiked by 19M barrels in a spun off two weeks which were seen as the biggest increase for any two weeks since 1990. The result of this was a huge drop in the refinery profit margins. According to the demand and supply dynamics, an increase in the price of gasoline should lead to high supply and less demand. Evidently, the demand was at 8.81M barrels as of January 2016 which is the lowest level of demand according to the Energy Information Administration. On the other hand, the refineries produced much fuel products (16.5M barrels) as compared to those recorded since 1989. The price of gasoline per gallon at the pump was at the lowest since the year 2009 which lead to the poor profit margins for refineries (Neuhauser, 2014).

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The fall in demand could be attributed to some factors among which are the period of the year. The demand is expected to increase at the end of February into March ("Gasoline Supplies in U.S. Rise at Record Pace as Demand Falls", 2016). This is because the general price of gasoline at the pumps, though low, the demand was still declining even with increased supply which is contrary to the dynamics of supply and demand.

If the price of crude oil is decreased, the price of gasoline decreases correspondingly. Consequently, the demand for gasoline increases if all the other factors affecting demand are held constant. On the other hand, the supply of gasoline, to some extent remains favorably constant. In other words, there are high chances that the market equilibrium of gasoline will be attained if all the factors are held steady and favorable to the refiners. The supply and demand may balance off with a price that favors the ability of the consumers to purchase gasoline and at the same time maintaining a reasonable profit margin for the refineries thus maintaining a considerable supply (Neuhauser, 2014).

The increased supply may have been be due to the fact that there was an increased production of oil products since the most productive oil fields, Gulf of Mexico, has not been under any hurricane attacks through 2015 to 2016. Ideally, a hit of the Gulf by Hurricanes disrupts many oil rigs and thus reducing the supply of oil to the refineries ("4 Reasons Gasoline Prices Will Keep Falling | Bankrate.com", 2016). Hence, the continuous supply of the oil has ensured a constant supply of gasoline,which has even with the poor demand and the low prices of the gasoline.

Notably, there is an existence of healthy competition between the domestic oil production and the foreign oil production between the U.S and the Organization of the Petroleum Exporting Countries (OPEC). This has ensured that the prices of crude oil products like gasoline have been put to check the domestically produced oil for instance from the Gulf of Mexico provides cheaply acquired oil by the U.S refineries as they do not incur the cost of importation. Even though the domestic oil production is deteriorating, it has had a great impact on the production of gasoline. The prices are consequently fair, and this may have contributed to a continuous supply of gasoline (Neuhauser, 2014).

The demand and supply of gasoline in the U.S. should be kept in check so as to ensure that the government benefits from the incentives including the taxes paid by the customers and everyone involved in the chain of production and supply of crude oil and the resulting products. If a proper elasticity is maintained between the supply and demand of crude oil to the refineries, then a proper elasticity will result for gasoline. This will ensure that the domestic oil production is kept healthy thus keeping the prices of gasoline at affordable levels for the consumer and maintain good margins for the producers and the suppliers. Eventually, this will keep the U.S currency strong and consequently strengthen the U.S economy ("4 Reasons Gasoline Prices Will Keep Falling | Bankrate.com", 2016).

Conclusively, the article describes a situation where there is a high supply of gasoline and at the same time there being a declined demand. The author is right since; such a situation can exist based on the fact that demand is determined by two main factors related to the financial ability of the customer to purchase the gasoline, and the consumers taste. In this case, the price is quite favorable for the consumer and with regards to taste; the consumer has no alternative of an energy source other than gasoline. On the other hand, the time of the year indicates an off-peak of the use of gasoline in U.S with the demand increasing at the end of February. The supply is seen to be high since there are many sources of the raw material of gasoline, crude oil. There are many domestic and foreign sources of supply and consequently much supply of gasoline in the country. To sum it all up, though the price of gasoline is low the supply is high but the demand is declining and hence the poor profit margins for the suppliers and the refineries (Neuhauser, 2014)

References

4 Reasons Gasoline Prices Will Keep Falling | Bankrate.com. (2016). Bankrate.com. Retrieved 28 May 2016, from HYPERLINK "http://www.bankrate.com/finance/economics/reasons-gasoline-prices-drop-5.aspx" http://www.bankrate.com/finance/economics/reasons-gasoline-prices-drop-5.aspx

Gasoline Supplies in U.S. Rise at Record Pace as Demand Falls. (2016). Bloomberg.com. Retrieved 28 May 2016, from HYPERLINK "http://www.bloomberg.com/news/articles/2016-01-13/gasoline-supplies-in-u-s-rise-at-record-pace-as-demand-falls" http://www.bloomberg.com/news/articles/2016-01-13/gasoline-supplies-in-u-s-rise-at-record-pace-as-demand-falls

Neuhauser, A. (2014). Why the Price of Filling Up Has Been Going Down. US News & World Report. Retrieved 29 May 2016, from http://www.usnews.com/news/articles/2014/09/23/demand-drops-supply-surges-and-gasoline-prices-plummet