Why Is Gas Price Remaining High When Oil Price Is Going Down?

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Why Is Gas Price Remaining High When Oil Price Is Going Down? 

Part I: Why Is Gas Price Remaining High When Oil Price Is Going Down? 

To: Friend

With the passage of time, we have seen some of the largest emergency oil supplies in the world. In this regard, you know that the name of United States of America has always been on top of the list. The release of oil from strategic petroleum reserves takes down the prices as the supply of oil increases. As a matter of fact, the world has so many oil reserves that we can use the oil for one third of the price being paid today. In 2012, the prices of oil were lowered however the price of gas increased. So do you know that what is the reason behind this imbalance of prices? In my opinion one of the biggest reasons is the safe haven buying of dollars because of concern over euro zone instability. There are no signs which notify that things will get better in the euro zone; in fact it may only seem that things will only get worst with time which will result in lowering the oil prices even more but the gas price higher.

            Of course conjecture has and always will play a part in fluctuations of oil prices. Although all of the geopolitical factors seem instinctively connected to the fluctuations in oil prices, they are not sufficient enough to explain the decoupling of oil prices from prices at the pump which remain the same or higher with no trace of going down. In fact the most probable reason for constant high gas prices is not as much “geopolitical” as it is economical. Simply put, when the price of oil reduce, retailers often do not reduce the price of gasoline at the pump instantly. Downward oil prices present the ideal opportunity to maintain higher profit margins for the moment. It recompenses for the times when oil prices are high and thus profit margins are low. Whether it is “testing the mean”, “risk-factoring”, “binding” or any glamorous name, it is a common practice of oil industry holders.

One major element that divides gas price from oil price is the cost of refining. As we know that oil must be initially refined to become gasoline and the cost that is used to operate these refineries is directly tied to the inflation.  Inflation has been the major cause of the rampant printing of money by the Federal Reserve and resulted in rising substantially. There is no doubt to the fact that the refineries need to pass down to customers the ever increasing cost of the process of refining oil. Another fact that cannot be denied is that inflation feeds on inflation. The distribution and the cost of marketing have a direct and powerful impact on the prices at the pump. The evolution of these costs correlates with inflation just like refinery cost does.

The weak dollar and inflation are the major components in the rise of the domestic cost of gas production and distribution at pumps. You should also do research on geo political factors that immensely affect the price of crude oil, domestic factors such as inflation are the reason behind the price fluctuating price of gasoline.

 

Part II: Short Answers

  1. Show that, compared to perfect competition, monopolies reduce output and increase price. Does this mean that monopolies are always against the public interest?

When in a market, there is only one company; it is likely that the company can freely set their prices. We can imagine that the monopolist chooses the price and let consumers decide how much you want to buy that good. This represents a suboptimal composition and inefficient, as consumers may lose resources because of the extraordinary profits that can represent the firm. Therefore, in economics, monopolistic market structure is inefficient and there is a concept that is undesirable. The monopoly sets a higher price and offers an amount less than perfect competition. The social cost of monopoly in relation to perfect competition, is the difference of quantities and the price difference (Mankiw, 2008).

In a perfectly competitive market, each buyer is charged the same price for each unit of the private good (adjusted for quality differences and transport costs). Since the product is as homogeneous as well assume perfect information on the part of buyers, there may be differences in the price of constant quality units. Any seller who tried to charge a higher price than the current price, you will find that no one buys the product. However, a monopolist may be in the ability to charge different people different prices and / or charge different unit prices for successive units purchased by a particular buyer. Monopoly source is at the cost of establishing a production plant efficiently, especially in relation to market size. This situation arises when the minimum average cost of production occurs at a production rate of more than enough to supply the entire market at a price that covers the full cost.

 

  1. Explain how the existence of externalities (whether from congestion or pollution) causes a less than optimal allocation of resources in road transport

Externalities are a type of market failure. An externality is the impact of the actions of a person in the welfare of another. If this influence is negative, it is called negative externality, if positive, is called positive externality. In the presence of externalities, society’s interest in a market outcome extends beyond the welfare of buyers and sellers in that market also include the welfare of others who are affected. As buyers and sellers do not take into account the external effects of their actions when deciding how much you are going to demand or offer, the market equilibrium is not efficient when there are externalities. That is, the equilibrium does not maximize the full benefit of society as a whole. For example the emission of dioxins in the environment is a negative externality. Paper companies who seek their own interest not take into account the full cost of their pollution and, therefore, emit too much unless the government is prevented or discouraged from emitting it (Mankiw, 2008).

Roads can be public goods or common resources. If they are not congested, its use by one person does not affect anyone else. In this case, they cannot be used as public private property as the roads are a public good. However, if they are congested, it generates a negative externality. When a person driving along road faces the increased congestion other people must drive slower. In this case, the road is a common resource. The state can solve the problem by charging tolls to drivers.

 

 

  1. Why might GDP not be a good measure of the level of welfare or economic activity within an economy?

The old controversy about the suitability of GDP as the sole measure of a country’s economic performance and, therefore, aim to maximize the economic policy (combined with inflation) has returned to the fore last week, following the publication of a report commissioned by Mankiw (2008). Clearly summarize in a single number the situation of an economy and, therefore, the success or failure of economic policy is a too short. There are numerous examples of problems in the measurement of activity. For example, a traffic jam means more fuel consumption and, therefore, more GDP, even if we consider air pollution and the effect on the welfare of citizens detained in the jam, the assessment should be clearly negative. Per capita GDP is a good measure of economic welfare enjoyed by a company, especially when we compare the situation and / or evolution from one country to another. GDP per capita tells us the income and expenditure of the average person or average in the economy. The GDP is not, however, a perfect measure of a country’s welfare, and it excludes important variables, such as (Lipsey & Chrystal, 2011):

  • Equity in income distribution.
  • The life expectancy of the country’s citizens.
  • The quality of their education.
  • The value of leisure.
  • The value of a clean environment.

The value of almost any activity that takes place outside the markets, as the value of time parents spend with their children and the value of volunteer work, the agricultural consumption, the work of housewives, the shadow economy, etc.

  1. What is meant by the multiplier? What determines its size and why does it matter?

The multiplier is the relationship between an increase in investment (of export, of consumption) and increasing revenue and provoked. The principle of multiplication can be illustrated with the following formula: “The reaction exceeds the action.” Thus, the increase in investment will increase not the national income by reason of a multiple amount and therefore superior to careen initial treatment.

The concept applies to changes in aggregate demand, largely autonomous as investment and government spending. Keynes When analyzing the economy, and due to the relationship between consumption and income, found that a variation autonomous investment product caused an increase greater than the change in investment. Multiplier would work like this: As a component of investment spending, an increase it directly causes an increase in income by the same amount. This rent increase will cause an initial increase in consumption by the amount by which the rent went up. Such increase in consumption causes again increased income by the same amount because consumption spending is a component. This new increase in income causes a further increase in consumption, this process happening repeatedly. Multiplier Applying the concept to establish as income will vary with the change of some variable; can be performed on Investment, government spending or autonomous consumption. It could also extend to variations of other variables, but I do not think that could be applied to the concept of interest. Referred to the interest, I hope you’re not confusing the monetary base multiplier, which is another type of multiplier, and could be affected by changes in the interest rate (Lipsey & Chrystal, 2011).

 

  1. Using Aggregate Supply and Aggregate Demand analysis explain the short- and long-run effects national economic output and prices of a reduction in government spending?

Macroeconomics seeks to understand the two different types of equilibrium, in which corresponds to the short run and the other to the long run. The short run in macroeconomics analysis deals with the period in which wages and some other prices do not respond to changes in economic conditions and these changes quickly adjust to maintain equilibrium in these markets. Moreover, a sticky price is a slow to adjust to its equilibrium price as it creates sustained periods of shortage or surplus. The stickiness of wage and price prevents the economy from its natural level of employment and its potential output. In contrast the long run of the macroeconomic analysis is a period in which the prices and wages are flexible. However, in the long run the employment will move with its natural level and real GDP to potential (Sexton, 2011).

Moreover, in the long run the aggregate supply curve is a vertical line at the potential level of productivity. The junction of the economy’s aggregate demand and long run aggregate supply curves determine its equilibrium GDP and price level. Furthermore, the short run aggregate is mainly an upward sloping curve therefore it shows that the quantity of total output that will be produced at each price level in the short run. Changes in the prices of factors of production shift the short run aggregate supply curve and in addition the changes in capital stock, the stock of natural resources and the level of technology can also cause the short run aggregate supply curve shift (Sexton, 2011).

 

 

Part III: The Price of Gold

This part aims to discuss the current demand of Gold in Jewellery, Investments and Technology in relation to the availability of Supply. In the economic environment in which we believe that gold still has growth potential for the coming year 2013 , but it is unlikely that he suffered cumulative increase the price of gold during the period 2004 to 2011 is repeated.

Demand of Gold

The gold demand is extended widely across the world. East Asia, the Indian Subcontinent and the Middle East comprises of 72 percent of the total world’s demand in 2007. 55 percent of the demand is attributed to only 5 countries Italy, India, USA, Turkey and China, every market determined through various sets of cultural and socio economic factors. The Rapid socio-economic and demographic changes in several of the vital consuming states are also expected to formulate new trends of demand.

The dental and industrial use of Gold accounts for nearly 13 percent of gold demand which is a yearly average of above 425 tons from 2003 to 2007. The Gold’s high electrical and thermal conductivity along with its great confrontation to corrosion and oxidation explains that why above half of every industrial demand arises from its application in electrical parts as a thin layer covering electrical connectors of every kinds hence assuring good connection.

The current research has exposed a number of new practical applications for gold, comprising its usage as catalyst for chemical processing, fuel cells and managing pollution. As gold is a first-class reflector of electromagnetic emission like visible light and infrareds along with the radio waves that are utilized for the defensive coatings on various artificial satellites, in infrared shielding faceplates in thermal shield suits and helmets of astronauts’ and in electronic warfare planes.

The investment demand has accelerated and the demand for Jewellery has declined. The year 2009 was the first year in which the demand for investments raised higher than the demand for jewellery. The gold purchases for Jewellery declined to 2190 tons in year 2008 and in year 2009 it has again fallen to 1758 tons. In the meantime, the signals of rising Investment had been everywhere. This was higher than the slump in jewellery trade as the total demand in year 2000 was highest since year 2000 (Lipsey, 2010).

The demand of Gold continues to expand steadily at global basis. Around sixty percent of present global population resides in the fastest expanding economic area of the world, Asia. 100 years ago the gold demand which come from poverty stricken and economically weak Asia was from a handful of aristocrats. At present, around 4 billion people in these rising economics will contribute a considerable portion of today’s and potential gold demand.

Gold climbed to a new record at Euros 1385.07 an ounce on Monday, 10.01.2012, as investors sought refuge from the fear that European officials fail in their attempt to contain the spread of the European debt crisis and uncertainty over the debt limit of the United States. Fears that the European debt crisis is spreading to other EU countries have pushed gold.

Gold, which so far this year raised more than 25% in dollars in 2011, can occupy a larger place in the portfolio of investors. Next year promises to be volatile financial markets and there will be need for cover because all the dollars that were issued in 2010 may put pressure on inflation. The metal did not disappoint. So far this century lived up to their status as “refuge” and rose 400% in dollars. Many savers who had eyes only for the fixed terms, the dollar and equities started taking crash courses on how to invest in gold. ‘s metal demand by retailers increased by almost 100% this year (Lipsey, 2010). The most searched ingots were “good delivery” (purity 9.999) certified Swiss banks, although more conservative clinging to his devotion followed by gold coins. The metal was always a crisis and refuge when everything else goes down. But in 2010 showed he can shine with rising stocks and bonds. It was the great hedge against dollar weakness. A customer demand added weight, as the central banks of India and China, who do not want their reserves are exposed to be in dollar bonds and U.S. Treasury Euros.

Supply of Gold

In terms of the supply factor the major source of the new gold type which is being dug out from mines of Gold is at a declining trend. The production of Mines was highest in year 2001 at 2645 tons and this was only a bit lower than since ever. The mixture of increasing exploration and production costs are diminishing outputs from established mines of South Africa and North America (Schill, 2006). The economic and political instability indicates that the deliveries from mine might not be completely ramped.

One of the other potential supply sources of Gold is the vaults of the Central Bank. The IMF (International Monetary fund), ECB (European Central Bank) and National Central Bank carried out higher than 30,000 tons together. On average basis, they sold around 520 tons annually between the years of 2000 and 2007. In the previous year, the flows from the Central bank nearly dried up, along with the price being soared (Mankiw, 2008). The largest manufacturers of gold are USA, South Africa, China, Australia, Russia and Canada. The world’s chief refineries of gold are located near the main mining centers or at valuable metals manufacturing centers in the world.

Gold prices will not fall with the economic recovery. With rising gold prices we’ve seen in recent times, is no longer fears the precious metal a safe haven for investors. Always buy gold as a safe value. Before, it was the gold-dollar equivalence. In recent times come to be something of a more tangible, more physical, they can continue to maintain its value. Gold has risen as much as other riskier securities, such as oil or bag. Indeed, many investors simultaneously bet for gold or actions (Mankiw, 2008). The fact that the value of gold is now set to the same levels as other riskier assets is a situation that occurs in a timely manner. It is believed that a correlation, but it is something that occurs in the short term. The current balance is anticipated that there will continue. Given the economic recovery, many think it is time to start buying gold at lower prices. At present there are two forces that hold gold in a stable price range.

On one side are investors who buy and sell used gold for profit and on the other those who use the metal as a safe haven. Thus there are two movements are compensated: Investors that come out and investors who buy to maintain long term. Throughout this year, the euro-dollar will remain the same and therefore we do not expect that the price drops. Some analysts put the price of gold at £ 2,163 per ounce later this year 2010. It expects gross domestic product to grow about 4 percent worldwide. This represents a significant increase compared to previous years. If the green shoots start, people will not buy much gold.

It is expected in the third quarter as U.S. companies begin to climb with no signs of decline, but positive growth. So, do not contemplate that the value of gold is as high as some analysts say. No direct relationship between investments in gold and economic recovery. In a post-crisis recovery situation there may be coincidences point but not an ongoing relationship. There are investors who bet on the money and buy it because it is cheaper, but also more volatile. There is a raw material that could replace the gold. If only because banks use it in their reserves, and has a feature that no other commodity.

 

 

References

Congress. (1985). Congressional Record, Volume 131. Washington Dc.: Government Printing Office.

Gaur, A. and Bansal, M. (2010), “A Comparative Study of Gold Price Movements in Indian  and Global Markets”, Indian Journal of Finance, Vol.4, No.2, pp.32-37.

Ghosh, Dipak, Levin, E. J., Macmillan, Peter and Wright, R. E. (2002), “Gold as an Inflation

Hedge”,  Discussion Paper Series No.0021, Department of Economics, University of St. Andrews.

Kim, Youngje (2002), Gold Analysis, web.syr.edu/~ykim30/file/gold.pdf

Lipsey, R., & Chrystal, A. (2011). Economics. London: Oxford University Press.

Mankiw, N. G. (2008). Brief Principles of Macroeconomics. London: Cengage Learning.

Mankiw, N. G. (2008). Essentials of Economics. London: Cengage Learning.

Sexton, R. L. (2011). Exploring Economics. London: Cengage Learning.

Schill, M. J. (2006). “New Perspectives on Investing in Emerging Markets”.  The Research Foundation of CFA Institute, Emerging Markets (May)

 

 

 

 

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