Gas Price Elasticity

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Gas Price Elasticity The Energy Information Administration of the Department of Energy began tracking weekly gasoline prices in 1990 by means of a survey of 800 service stations around the country. The average retail price for unleaded gasoline posted its fourth record high during the week of June 12, 2000, increasing 5 cents a gallon to an average of $1.681. The price at the pump is higher than the same period last year by 56 cents and has risen 16.2 cents over the past month (Anonymous, 2000). How far will it rise? What will consumers do about the dramatic increases that are occurring with the arrival of each shipment? Price elasticity of demand would indicate that demand will fall as prices continue to rise, which in turn should result in a reduction of prices and a subsequent increase in demand. Such may prove to be the case, but the scenario is an unlikely one. Prices have increased all over the country, but price increases in the Midwest have been even more dramatic than in other areas. Across the region, prices are averaging $1.874 for a gallon of unleaded, but that same product is well over $2 a gallon in many of the cities of the Midwest. Higher grades average $2.003 across the region, marking the first time that average prices have been so high in a specific region of the country (Anonymous, 2000). There is so much concern over the rising prices that apparently are continuing to rise without abatement that the Federal Trade Commission (FTC) has "opened a formal investigation into soaring gasoline prices in some areas of the Midwest and will begin issuing subpoenas to oil companies by the end of the week" (Hebert, 2000; p. aol). Sen. Richard Durbin, D-Ill. believes that the oil companies will reduce prices right away once the subpoenas begin to appear, and the country's vice president has mentioned that collusion may be behind the oil companies' huge profits this year (Hebert, 2000). The summer driving season always brings higher prices in response to heightened demand, but never to the extent seen this year. Of course the final cost of gasoline at the pump is affected by the price of a barrel of crude, but to a lesser extent than oil producers would have consumers believe. The price of crude accounts for only 30 percent of the final cost to the consumer (Brodrick, 2000a). In 1981, the cost of crude accounted for 62 percent of the final c... ... middle of paper ... ...evert to normal levels following the world oil shortage in the 1970s, but of course that never happened. Because the government controls more than 37 percent of the final cost, only 63 percent of the cost is open to being affected by market forces. Gas is a low elasticity product for the reasons discussed above; the wonder is that it does not cost even more at the pump. References Anonymous (2000). Economics 52 - Using Price Elasticities to Forecast Prices. At Anonymous (2000, June 19). Record Gasoline Prices for Fourth Week in a Row. Reuters at Anonymous (2000). The Strategic Petroleum Reserve. US Department of Energy, Fossil Energy at Brodrick, Cynthia E. (2000, February 15). How do gas costs affect consumers? At Brodrick, Cynthia E. (2000a, February 15). The cost of a gallon of gas. At Georgy, Michael (2000, June 20). OPEC Prepares To Raise Oil Exports Again. Reuters at Hebert, H. Josef (2000, June 20). FTC Opens Gas Price Investigation. The Associated Press at

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