Gas Prices inch up as oil prices rise

Jimmy Bradshaw

Over the past two weeks, the price of self serve regular gasoline across the United States rose by 5 cents, according to the Lundberg Survey. Last Friday, the average price of gasoline was $2.82 a gallon, up 5.23 cents from two weeks ago.

As crude oil prices began to rise at the beginning of the month, retailers at first were willing to lower profit margins in order to retain cheap and competitive prices; however with the price of crude oil steadily increasing over the past month, and with firms deciding to increase profit margins, customers have seen a nominal increase in prices.

The initial factor in the rise of gas prices was an increase in the price of crude oil, which has been linked to bad unemployment numbers in recent months, as well as expectations that the Federal Reserve may increase the money supply. By increasing the money supply, inflation occurs which causes the value of each individual dollar to become weaker. Another factor in the increase in gas prices is the rise in the prices for ethanol. This is because there are mandates requiring certain amounts of ethanol to be sold mixed in with gasoline.

However the factors of supply and demand are not affecting gas prices according the article. “Our demand remains very weak and our supply very strong,” the author of the survey, Trilby Lundberg said. The reason supply and demand are not having an impact on the prices, are because the weak demand and the strong supply are negating each other. Normally when the demand for a good is weak, prices are going to fall, at the same time when supply is high; a firm is going to increase its prices on goods.

I am surprised that the demand for gasoline is weak, because I would like to think that gasoline is a relatively inelastic commodity. However because of the recent recession less gas is being demanded by consumers. Consumers instead are using more mass transit options, and are also not taking the leisure car trips, that were being taken before the recession. In both of these prior instances, gasoline was being used much more frequently than it is now.

When looking at the increase in crude oil prices and the increase in ethanol prices, firms are left with the option of either raising gasoline prices, or taking a cut back on the amount of profit they will earn from the sale of gasoline. And because the rule in economics is for firms to maximize profits, firms will almost always increase prices of their commodity, rather than taking a cutback on their profit margin.

In conclusion, the price of a product is a direct result of the prices of its inputs, and when the inputs for a good rise, in this case ethanol and crude oil, the price of the output, gasoline, will also rise. Normally supply and demand also factor in to the pricing of goods, but because in this case there is weak demand coupled with strong supply, prices are not affected one way or another.

http://money.cnn.com/2010/10/24/news/economy/gas_prices/index.htm