Course Project

november 2013 Professor yeung |

Course Project Part 1 |

Business Economics |

|

David Gui |

11/12/2013 |

This is part 1 of the course project in fulfillment of ECON 545. This paper analyzes the microeconomic issue “Everyone’s Gasoline Problem”, and Question 14 from Chapter 3 and Question 18 from Chapter 5. |

Exercise 1: Everyone’s Gasoline Problem

Chart 1 (GasBuddy, 2013)

When look at the average regular gasoline prices in the past 12 months in Seattle, we can see that the prices have been fluctuating in between the one-year period, where regular gas prices average was $3.585 exactly a year ago, and today (November 12)’s prices average is the lowest in 12 months at $3.267. Moreover, in the one-year period, the highest prices average was $4.04, which happened in May 2013.

Fluctuations on prices of gasoline are attributed to fluctuations on prices of crude oil. In United States, crude oil prices make up 72% of the prices of gasoline, the rest of what consumers pay at the pump depends on refinery and distribution costs, corporate profits, and federal taxes. Usually, these costs remain stable, so that the daily change in the price of gasoline accurately reflects oil price fluctuations. (Amadeo, 2013) Oil prices are a little more volatile than gas prices. This means oil prices might rise higher, and fall farther, than gas prices. (Amadeo, 2013) Government regulations, shortage of supply, and Middle East tensions all have an influence on prices of oil. For example, in 2012, when Iran threatened to close the Straits of Hormuz, oil prices rose to their peak at $128.14 a barrel on March 13, and gas prices reached $3.997 on April 9. Both returned to normal until August, when commodities traders began bidding up oil prices to $117.48 on September 14. They were hedging against the Federal Reserve’s QE3 program, which they thought would lower the value of the dollar, which would force oil (which is priced in dollars) to be higher. Then, Hurricane Isaac...