Economics Supply and Demand of Gasoline



The paper tells that the gasoline price has ostensibly undergone extensive fluctuations mainly because of the product nature and the industry which supplies the world with oil. Note that a bulk of the aggregate oil output is produced by the Organization of Petroleum Exporting Countries (OPEC). This influential group is organized as a cartel and composed of nations in the Middle East including United Arab Emirates, Saudi Arabia, and Kuwait among others. The main produce of these countries is oil and other petroleum products. Other countries, including the United States, are largely dependent on these countries for their oil supply. With their rich oil resources, these nations created the cartel which has the ability to control member countries’ oil production capacity and output quotas enabled them to collude to raise the oil price by. Given its mandate, a supply of oil including gasoline is significantly affected by political unrest arising between these oil-exporting countries and other countries as well. To illustrate this point, a supply of petroleum products was adversely affected by the war between Iran and Iraq in 1979. This tumultuous battle between two of the largest oil producers had caused a global oil supply shock and resulted in a dramatic increase in the price of oil. The limited oil supply then was further aggravated by the restricted means of transporting oil products to the rest of the world. Similarly, Iraq’s invasion of Kuwait that spawned the Gulf War also caused a leftward shift in the supply curve during early 1990’s. Aside from wars, OPEC also has the power to impose sanctions by restricting the supply of oil production to other countries in light of political reasons. For instance, the cartel initiated an embargo on export oil and cut down supply as an indication their protest for western nations’ support of Israel. This caused a sharp leftward shift in oil supply curve and ultimately resulted in the severe escalation in the price of oil in 1973. In terms of domestic supply, the United States recently encountered supply shortages brought about by Hurricane Katrina. It is reported that the calamity has adversely impacted the supply chain from the off-shore rigs in the Gulf Coast, which is the largest source of oil for the domestic market. The short-term shutdowns due to power outages during the peak of the hurricane-affected two major on-shore pipelines. Furthermore, it was reported that at least 10% of the country’s refining capacity was not operational in the wake of the storm. Apart from these, Louisiana, the epicenter of the hurricane and heavily devastated, also houses one of the main ports that serves as one of the most important inlets for oil imports. This means that supply is not only affected by the factors affecting actual production but also by the transportation of oil products.