Economics of Oil Prices
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In the summer of 1984, Iran and Iraq began firing missiles at oil tankers leaving the Persian Gulf. Analysts in the gas industry predicted that gas prices at the pump would rise due to fear of a potential decline in gas supply. However, in contrast to expectations, gas prices dropped. As it happened, the last half of the winter of 1983-4 was much colder than average. This prompted an increase in demand for heating oil. Heating oil is produced through a process of refining that happens to also produce gas - two gallons of gas for every gallon of heating oil produced. As a result, excess gas went into storage over the winter, and come summer gasoline stocks were 13% higher than they were the previous summer. Before prices ever managed to increase in response to the crisis in the gulf, an increase in supply at the pump caused prices at service stations to drop - to the benefit and joy of consumers. This is just one example of how a research paper on the economics of oil prices can illustrate the complex factors that are involved in calculating oil prices.
Oil Prices and Consumers
Lower prices do not always attract more consumers - just like higher prices do not always deter them. When consumers consider a purchase of a good or service they also take the relevant opportunity cost in to account. In the Northeast, New Jersey sh-ares borders with New York and Pennsylvania. But New Jersey does not share taxes with those states - in fact, taxes on gasoline in New Jersey average 10 to 20 cents less than in neighboring states. As a result, consumers who find that New Jersey gas is cheaper even considering the opportunity cost, which consists of resources spent on driving to New Jersey (time, gas, wear and tear on the car), will drive to New Jersey to fill up.
The Science of Economics
Economics is a complex science and economic terms are often confusing - but economics underlie much of our daily activity, and economic analysis can be applied to most any situation in which humans interact and conduct some kind of exchange. The better our understanding of economics, the more we can leverage that understanding to maximize our utility.
Economics is the study of how consumers of goods allocate their scarce resources to maximize utility (economic parlance for benefits).It works in the following way:
- Scarce resources can include money, but also time and labor. Consumers' desire to maximize their utility creates demand.
- To satisfy this demand, producers use labor, land and capital to create a supply of products and services.
- Since consumers demand can be satisfied by a variety of supplied products and services, consumers face an opportunity cost when choosing to consume one product over another.
In the context of oil prices, the goods supplied by the service station operators include, obviously, gas - but may also include a variety of other goods and services such as convenience store goods, tune ups and oil changes, car washes and so forth. Such goods are often complemented by incentives provided by the gas station in order to compete more effectively with other service stations. Incentives may include various levels of customer service, raffle tickets, coupons etc.
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