HIGH GAS PRICES IN 2008
Gas prices are extremely high in this year of 2008. In July the barrel of oil hit the price of 140 dollars, while last year the barrel of oil only cost 78 dollars. We can say that the barrel of oil inflation rate is almost one hundred percent compared to last year. There are many reasons why the prices of the barrel of oil skyrocket.
A large portion of the population, including politicians, judging from recent hearings seems to believe that "price gouging" is the explanation for higher gas prices. This explanation doesn’t take in consideration the fact that oil companies do seek to maximize profits, but they can't do so by merely raising the price of gasoline. The market, production, demand and supply, are the real factors that determine the price of a barrel. Therefore, ‘profiteering’ cannot be a reasonable explanation of why the price of oil has gone up dramatically in these past months.
A reasonable answer for the increase in prices of the barrel is a drop in the oil supply with continuous high demand. Following is graph from Weekly Petroleum Status Report which shows the patterns of the stock of oil in the past year.
Figure 1: U.S. Gasoline Inventories Through April 2007. Source: EIA
The relationship is clear. As gasoline supplies were rapidly pulled down, gasoline prices lagged at first, and then raced to catch up. It was apparent by February or March that the rate of descent was highly unusual, and sharply higher prices would be required to stop the plunge. The excessive demand promoted a more competitive marked for oil, which with fewer inventory caused the prices to increase.
How the oil price increase affects society?
It is important to remember that not only consumer were affected by the high gas prices which is currently hitting $1.36/L, but also business owners are affected by this crisis.
In an interview, the director of AutoProCanada, a Canadian online auto classified, alleged that used car sales haven’t gone down significantly, but he sees a different pattern of buyers when choosing a vehicle. According to him, buyers are searching for more gasoline efficient vehicles, he goes on explaining that the sales of trucks and SUVs are not as significant as it was a couple of years ago.
For the future, North Americans are hoping the market for gasoline will balance soon, the supply and demand of oil will come into a reasonable equilibrium and that the prices will fall in the next months. However, considering the war in Iraq, the mission in Afghanistan and the political instability in the United Sates with the upcoming elections, it is very hard to predict the trend of prices of oil in the near future.