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In late August, hurricane Gustav began approaching
the southern coast of the U.S. threatening, among
other things, more than 4,000 oil and gas
installations in the Gulf of Mexico. Oil prices rose
in anticipation of the destruction (Hurricanes
Katrina and Rita destroyed 109 oil platforms and
five drilling rigs). Natural disasters like
hurricanes are among the factors that can affect the
price of oil by diminishing the supply of refined
oil.
THE PRICE OF OIL:
Why does the price of oil fluctuate?
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Supply and demand
When it comes to oil, the fundamental economic
principle of supply-and-demand readily applies:
when the supply decreases, the demand (and
therefore the price) goes up. Although modern
equipment can dig deeper and new sources are
periodically discovered, oil (like gold and
diamonds) is a limited commodity which cannot be
manufactured artificially. The value of crude
oil (that is, oil that is not refined) will
continue to grow as the supply is depleted
until, one day, it will become so expensive that
no one will buy it anymore. At that point,
drilling will stop.
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Natural disasters
Natural disaster like earthquakes and hurricanes
can damage rigs that drill oil decreasing the
supply of oil on the world market. A hundred and
nine oil platforms and five drilling rigs were
destroyed by hurricanes Katrina and Rita in
2005, for example, causing oil prices to rise
from $104 per barrel to almost $120 a barrel.
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Increased demand
When countries like China and India begin
consuming more oil, there is less available for
the rest of the world causing the price to
increase.
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Refineries
Oil needs to be refined before it can be used as
car fuel and other uses. When the demand for
refined oil outpaces the capacity of refineries
to refine it, prices will go up. On the other
hand, if there are too many refineries and not
enough oil, refinery profits will go down
forcing some to shut down. If too many
refineries shut down, the shortage of refineries
will cause prices to rise again.
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Transportation
Companies that transport oil products also need
to make a profit. If you live far from oil rigs
or a refinery, you will probably pay more to
have the oil brought to you. To compensate
for high transportation costs, some states far
from the Gulf of Mexico (where there are many
refineries) turn to ethanol, a natural fuel
processed from grain alcohol (made of corn,
sugar cane or other products) (see below)
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Taxes
The federal government collects 18.4 cents on
every gallon of gas sold in the country. State
taxes can vary from 26 cents a gallon
(Alaska, Jan. 2008) to 64 cents per gallon in
California (Jan. 2008). (See
Chevron chart)
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Government regulations
Regulations dictating the quality of gasoline
differ from state to state. States that require
cleaner burning gasoline with emissions-reducing
additives will pass the extra cost to consumers.
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Gas stations
Service stations add to the price of gas in
order to keep their establishments running. Some
gas stations will add a couple of cents to each
gallon, others will add more -- but they are in
competition with other service stations nearby.
When gas prices are high, drivers will make an
extra effort to fill their tanks at the cheapest
station.
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Politics
World events such as wars or boycotts can play a
significant role in the price of oil. As
punishment for America's support of Israel
during the Yom Kippur War against Syria and
Egypt in 1973, for example, oil-producing Arab
nations curtailed production of oil by five
million barrels per day. The price for oil
increased 400% in six months as a result.
War between two of the largest oil producing
countries, Iran and Iraq, in the 1980s also
caused the international supply of oil to drop
resulting in higher prices.
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Speculators
Oil, like other commodities, is traded on the
stock market. When speculators believe the price
of oil is going up, they will buy large
quantities of it as an investment thereby
decreasing the supply available for sale and
causing prices to rise.
ETHANOL
Ethanol is grain alcohol that comes from corn,
sugarcane (especially in Brazil) and other products.
Benefits of Ethanol:
Since ethanol is renewable (corn can be grown every
year), the supply is unlimited -- that is, as long
as fields remain fertile and active (storms in Iowa
last year disrupted the production of corn causing
ethanol prices to rise).
Ethanol is also a clean fuel. Unlike
oil-based gasoline, it doesn't emit greenhouse gases
like carbon monoxide and nitrogen oxides.
Downfalls:
There isn't as much energy in ethanol as there is in
regular gasoline. Some experts also claim that more
fuel is used to produce ethanol that it yields.
Since ethanol cannot flow through pipelines, still
more fuel is used to transport the commodity by
truck.
With so much corn being diverted for
the production of fuel, less is available for food
and animal feed. Farmers who have to pay more to
feed their cows, pigs and chickens will pass the
extra costs on to the consumers. Hence, the
production of ethanol results in higher prices for
beef, pork, milk, cheese, chicken, eggs and other
farm products.
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