Supply and Demand - Gas Prices

Supply and Demand: Gas Prices

Demand for gas, in the summer of 2005, was bigger than ever. It is well known that when people on vacation use a large amount of gas. At the same time with the raise in car sales the demand for gas is expected to increase. Similarly, global warming makes the use of energy increase, and for the production of energy we use products derived from oil.

The elevated demand for products derived from oil leads us to increased cost of gas. Negative effects after natural disasters, like Katrina, also influence the price and demand of oil prices. Fatal demand is one way of looking at this situation because the progress of companies demand an increased usage and for people the use of car is not a luxury anymore, it is a necessity. Gas prices were between $2.20 and $3.30 in October 2005.

The law of demand is an economic category that conveys the social requirements. This represents the total quantity of a certain good that the economic agents are willing to purchase within a certain time frame and for certain prices. The same principle applies to gas and crude oil. Supply, price and demand can be influenced by several factors like: social needs, price levels, income levels, demographic factors, or price of replacement goods.

Price can be determined by a series of influencing factors: price of resources, price of other goods (gas), technology, number of offers, market perspectives, cost of production, taxes, and natural or social-political factors.

Large car manufacturers reached the conclusion that the increased price of oil can lessen their sales, which is why they are lobbying the government authorities to help them introduce alternative technologies to reduce the dependence on oil. In 2005, Ford announced a program of production of hybrid cars until 2010, approximately 250,000 vehicles a year. The hybrid technology allows the reduction of fuel demand through development of cars with one or more electric motors along with the conventional gas cars. Batteries help to the propulsion of the car and can be recharged automatically during breaking. The group intends to produce more cars that can function on ethanol. General Motors (GM) will collaborate with BMW and DaimlerChrysler to develop a new hybrid technology for vehicles. In August of 2005, General Motors and DaimlerChrysler agreed to the development of a car that reduces the demand of gas by 25%. General Motors will utilize a new technology by the end of 2007 for the Chevrolet Tahoe and GMC Yukon.

The evolution of gas price was always linked to the fluctuating prices of crude oil. This is a normal process because gas is a product derived from crude oil. Talks of a barrel of crude oil reaching $150 seem to be coming true. Behind the geopolitical tensions are also the meteorological factors that put a damper on our economy. The specialty meteorological laboratories announce a extremely active season of hurricanes; a repeat of past disasters that can impose an increase in barrel prices between $70-$80.

General Motors is the first victim of the spiral of crude oil. Costs for GM’s prime materials, like steel and aluminum, have increased by approximately $550 per vehicle for steel, and a bigger increase for aluminum. Aluminum demand has increased in the last 20 years and the raised price of gas has affected the sale of SUV cars, a profitable niche for GM.

Infrastructure, transportation, insurance, commercial balance, even car dealers have problems because of the oil price increase. Raised gas prices will reduce global economic progress and will increase the deficit in developing countries and also in the already developed countries. Ergo, supply, demand and price will always influence our economy. Raised crude oil prices means raised gas prices, furthermore, raised prices for: steel, aluminum, and most goods available to consumers.