What Affects Gas Prices?

Diana Rdzanek

Energy Law

Professor Bosselman

December 7, 2010

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Gas prices are always changing, but why? I’ll bet this helpful power point presentation will tell me more!

Major Factors that Affect Oil Prices

• Economic Factors• Environmental

Factors• Political Factors• Other Factors

Economic FactorsSupply and Demand• Prices of

commodities depend on supply and demand– This particularly

applies to finite resources like oil

• But what changes supply and demand?

Economic Factors

• Global Oil Demand– Oil demand is a function of income and

price– Demand does not change quickly,

especially in the short run

• Projections for Oil Demand– Look at the relationship between oil

demand, prices, and income to project future oil demand growth

Sound 1

Sound 2

Economic Factors

• Global Oil Supply– Modeling and predicting oil supply is much

more complex– Major uncertainties

• Geopolitical factors, supply chain disruptions, environmental disasters, technological breakthroughs

• Unpredictability of OPEC behavior and long-term price and income information affecting demand

• Disagreement over the actual amount of reserves available

Economic Factors

• Global Oil Supply: Role of OPEC– OPEC acts as swing

producer equilibrating demand and supply OPEC acts as swing producer equilibrating demand and supply with optimal prices/quantity levels with optimal prices/quantity levels 1

2

Economic Factors

• Supply-Demand Limitations– Hard to project oil prices in any economic

framework• Mistakes result from number of reasons

– Must make many assumptions– Cannot predict unexpected shocks– Non-neutral context– Unpredictable environmental (part II) and political

(part III) factors

Environmental Factors• Unpredictable geological and events can affect

oil prices either positively or negatively– Short-term and long-term impacts– Two Examples:

» Increase oil prices: Hurricane Katrina» Decrease oil prices: Eyjafjallajkull eruption

Environmental Factors• 2010 eruptions of Eyjafjallajkull

– The Geological Event• Seismic activity begins at end of 2009• March 20, 2010: small eruption begins• April 14, 2010: eruption enters second phase– 250,000,000 cubic meters of ash and tephra ejected intp atmosphere

• May 21, 2010: second phase subsides• May 24, 2010: eruption is limited to water vapor

• October 2010: eruption declared officially over

Environmental Factors

Composite map of volcanic ash cloud spanning April 15 - April 25, 2010

Environmental Factors

• 2010 eruptions of Eyjafjallajkull– The Air Travel Disruption

• Volcanic ash is major hazard to aircraft• Ash cloud leads to closure of most of Europe’s airspace

• Highest air travel disruption since the Second World War

Environmental Factors• 2010 eruptions of Eyjafjallajkull

– Effect on Oil Prices• Unburnt fuel from canceled flights - changes supply and

demand– Consumption reduced by 1m barrels per day

– Jet fuel stockpile increases by 5m barrels

• Oil prices seesaw

Environmental Factors• Hurricane Katrina

– The Weather Event• August 23, 2010: Tropical Depression 10 forms over

southeastern bahamas• August 24, 2010: system upgraded to tropical storm and

given the name “Katrina”• August 25, 2010: system becomes Category 1 intensity

hurricane, makes landfall in Florida• Storm enters Gulf of Mexico, reaches Category 3• August 27, 2010: hurricane doubles in size, and reaches

Category 5. • August 29, 2010: Katrina makes second landfall in Gulf of

Mexico in Louisiana/Mississippi

Environmental Factors• Hurricane Katrina

– The Fallout• Storm interrupts production and importation• Power outages cause distribution problems• 20 offshore platforms missing, sunk or adrift

Large Oil Spills Caused by Hurricane Katrina

Spill locationQuantity

(US gal) (L)

Bass Enterprises (Cox Bay) 3.78 mil 14.3 mil

Shell (Pilot Town) 1.05 mil 4 mil

Chevron (Empire) 991 K 3.75 mil

Murphy Oil (Meraux/Chalmette) 819 K 3.1 mil

Bass Enterprises (Pointe Hache) 461 K 1.75 mil

Chevron (Port Fourchon) 53 K 200 K

Venice Energy Services (Venice) 25 K 95 K

Shell Pipeline Oil (Naim) 13 K 51 K

Sundown Energy (West Potash) 13 K 49 K

Environmental Factors

• Hurricane Katrina– Gas prices go up

• August 30, 2010: prices rise over 50 cents per gallon in 24 hours

• Long lines at gas stations• Crude released from

Strategic Petroleum Reserve

Environmental Factors

• How do changes in oil prices affect the environment?– Disadvantages

• Increase in price of oil drives utilization of fossil fuels

– Greater investment in tar sands - pollutes the environment

» Shell and BP produce oil from tar sands at $40/barrel and sell for much greater profits, at expense of environment

– High gas prices result in greater use of coal - worse for environment

» Fewer geopolitical risks with coal

Environmental Factors• How do changes in oil prices affect the

environment?– Advantages

• Consumers switch to alternative fuels when gas prices are high

– Wind, solar power, ect. - better economic option

• Rising oil prices encourages recycling• Nuclear power option considered more when oil

is high– Better for environment balanced with apprehensions

of safety and concerns about waste disposal

Political Factors

• World politics are one of the more volatile factors that affect the oil trade, and prices at the pump

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Political Factors

• World-wide effects:– Venuzuela, December 2002: general strike

wipes out two months of oil production– Iraq, March 2003: invasion of Iraq drops

production from 2.5m to 500K b/d– Nigeria and Russia: politics interrupts and

reduces oil supplies

Political Factors

Parties within the US disagree about what

to do with our oil reserves, developing renewable energy,

and becoming energy independent.

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Other Factors• Taxation

– Takes take up a significant portion of what makes up the price of a gallon of gas

– Varies from state to state and locally

• Local market conditions• Competition between providers• Foreign exchange• Geographic location

Conclusion

• With so many factors affecting the price of oil, gas prices will continue to fluctuate