Is the Price of Gasoline Really Too High?  From EconEd Link

 

Introduction

 

Planning any road trips this summer? Maybe to the lake or a new city. How about a national park or even an amusement park? If the answer is yes, better hope you have a ride that is fuel-efficient or get ready to feel the pain in your pocketbook because you and your traveling buddies will face some of the highest gasoline prices ever. It is hard to believe that just two years ago, we were paying much lower prices. What happened here? How did U.S. consumers move from paying incredibly low to incredibly high gasoline prices in just short two years?

Let's look at two, hypothetical 1000-mile road trips, one taken in 1998 and the other in 2000. For the 1998 trip assume we paid $1.10 per gallon and our sport utility vehicle got 18 miles to the gallon. Calculate the fuel cost of the trip. What would the same trip cost this summer? Let's assume we have the misfortune of paying the highest gasoline prices currently available in the US at $2.28 per gallon. Calculate the fuel cost of the trip. Not impressed? What if you commuted 100 miles per day in that same sport utility? Calculate the yearly fuel expense for 1998, assuming you drive five days per week and take three weeks of vacation. Now calculate the cost of that same commute for 2000. How is your checking account feeling now? Do these high prices seem out of line, unfair, or just too high? What do you think is going on?

Many individuals, business owners, and politicians are complaining that the price of a gallon of gasoline is just "too high." What do people mean when they say "too high"? The notion of a price that is "too high" implies that consumers are being somehow unfairly treated or abused by overzealous corporations. In a market system, producers must compete for consumer dollars, with price determined by the interaction of supply and demand. Under competitive circumstances, we do not consider a price too high or somehow unfair; we accept the actions of buyers and sellers as the most efficient method for allocating resources. In other words, if some people want to pay $75 for a ticket to Bruce Springsteen concert, that is their problem. If, however, the market is less than competitive and firms are not competing in a legal way for consumer dollars, we have a situation where prices may actually be "too high." In this Economics Minute we'll try to determine what forces are driving the high price of gasoline and if the market is competitive. If the market is competitive, then the high prices we are experiencing are appropriate given the current levels of supply and demand. If, on the other hand, the market for gasoline is not competitive and firms are artificially manipulating prices, then the current price of gasoline is too high and some government action may be necessary.

 

Part One

To determine if gasoline prices really are too high (the market is noncompetitive), you will need to investigate the four general cost components of the price of a gallon of gasoline. The data below will provide the basis for your research.

Average Price of Gasoline Oer Gallon by Cost Component

Find yourself a group with three other students (or your teacher will form four-student teams). Each student on your "home" team will select a cost component to investigate. This investigation will send each of you to several different web sites where you will gather the information necessary to determine if the market for gasoline is competitive. You will also meet with the other team members in the class who have the same fuel component factor to discuss your common component. You will then regroup with your home team to brief each other on what you have learned and work together to determine if gasoline prices are "too high." Then you will present your finding to the class.

Assign each member of your team to one of the following four components:

  1. Crude Oil
  2. Refining
  3. Marketing and Distribution
  4. Taxes

Find your cost component below and follow the directions that are provided.

Cost Components

Crude Oil
You have been assigned to the crude oil cost component of gasoline. Your task is to become a mini-expert on crude oil so that you can brief your home team on the relevant issues related to this component. You can see from the cost information, above, that crude oil accounts for a huge amount of the total cost of a gallon of gasoline. What percentage of a gallon of gasoline is represented by your crude oil component? How has the crude oil component changed from 1998 to 2000? Your objective is to utilize the following web sites to help you understand what is happening with the price of crude oil. To answer this question you will investigate current information about the supply and demand for oil. As you know from your earlier work, prices are determined by the interaction of supply and demand. Your task is to become a mini-expert on gasoline refining and distribution and to be prepared to brief your home team on the relevant issues in this component of gasoline. Follow the links below to conduct your research and follow the instructions that accompany each link.
http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2000/a_year_of_volatility/sld002.htm
http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2000/sen071300/sen071300.htm

Refining
You have been assigned to the refining cost component of gasoline. Your task is to become a mini-expert on refining so that you can brief your home team on the relevant issues related to this component. You can see from the cost information, above, that refining plays an important role in the price of a gallon of gasoline. What percentage of the price of a gallon of gasoline is represented by the refining component? How has the refining component changed from 1998 to 2000? Your objective is to utilize the following web sites to help you understand what is happening with the cost of refining crude oil into gasoline. To answer this question you will investigate current information about oil refining and the government regulations for cleaner-burning fuel. Your task is to become a mini-expert on gasoline refining and distribution and to be prepared to brief your home team on the relevant issues in this component of gasoline. Follow the links below to conduct your research and follow the instructions that accompany each link.
http://www.ec.gc.ca/emission/3-2e.html
http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2000/a_year_of_volatility/sld010.htm
http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2000/a_year_of_volatility/sld011.htm
http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2000/a_year_of_volatility/sld013.htm

Marketing and Distribution
You have been assigned to the marketing and distribution cost component of gasoline. Your task is to become a mini-expert on marketing and distribution so you can brief your home team on the relevant issues related to this component. You can see from the cost information, above, that marketing and distribution plays a relatively small role in the price of a gallon of gasoline, but it is highly controversial. What percentage of a gallon of gasoline is represented by the marketing and distribution component? How has the marketing and distribution component changed from 1998 to 2000? Your objective is to utilize the following web sites to help you understand what is happening with the price of a gallon and if the current price, on a comparative basis, really is all that high. To answer this question you will investigate current information about distribution and marketing using the web sites below:
http://www.msnbc.com/news/423165.asp?cp1=1
http://www.api.org/consumer/gaspricecharts.htm

Gasoline Taxes
You have been assigned to the tax cost component of gasoline. Your task is to become a mini-expert on federal, state, and local gasoline taxes so that you can brief your home team on the relevant issues related to this component. You can see from the cost information, above, that taxes play an important role in the price of a gallon of gasoline. What percentage of the price of a gallon of gasoline is represented by the tax component? How has the tax component changed from 1998 to 2000? Your objective is to utilize the following web sites to help you understand the tax component of gasoline and why politicians are so interested in the price of gasoline. Your task is to become a mini-expert on gasoline taxes and to be prepared to brief your home team on the relevant issues in this component of gasoline. Follow the links below to conduct your research and follow the instructions that accompany each link.
http://www.eia.doe.gov/emeu/steo/pub/special/rfg4.html#Summary
(read the first five paragraphs only)
http://www.msnbc.com/news/423165.asp?cp1=1
(use the map to find the amount of tax for your state)


Part Two

Once you have completed your initial research assignments, find two other students who are also mini-experts in your cost component (or your teacher will group you with other mini-experts in the same area). Bring your notes from Part One. The purpose of this meeting is to discuss the facts and issues with other mini-experts. On the center of a sheet of paper, draw a circle about three inches across. Write the name of your cost component in the center of the circle. Pick someone to go first and ask that mini-expert to briefly state a fact or comment about his or her component. Write that statement (in smaller letters) somewhere outside of the large circle. Draw a smaller circle around the fact or comment and draw a line connecting the two circles. Follow the same procedure for the next mini-expert and so on until each new fact or statement has been placed in a circle. See the example below of a topic map:

TOM CRUISE FACTS

Topic Map of Tom Cruise Facts

Once the mapping is complete, write three multiple-choice questions based on what you and your fellow mini-experts feel are the most important points from the mapping. Finally, write a mini-group summary statement about the issues driving the costs of your gasoline component. A summary statement for the Tom Cruise mapping might be the following:

Tom Cruise is currently staring in a new movie entitled "Mission Impossible". Mr. Cruise is married to Nicole Kidman, a fellow actor. Tom also has five children and is known to enjoy car racing .

Design your summary to be helpful to the other members of your home team who have not studied your component area.

Part Three

Re-group with your home team and take turns briefing each other on each cost component. Utilize the concept maps and summary statements to communicate the critical facts and issues related to your component. As a group you will determine why the cost of gasoline seems to be so high. Use the following questions to help your group pull the various components together:

  1. What is the main issue associated with each cost component of gasoline?
  2. What claims do the various groups offer about the problem?
  3. Are there any solutions offered to the problem of high gasoline prices?

As a group and based on the information gathered, decide what has caused the high price of gasoline. Write a statement summarizing your group's opinion. Be prepared to present your findings to the entire class.

Closure

Your teacher will distribute the mini-expert quizzes. How well do you think you did? The issue of gasoline prices is complicated and political, and whenever something hits you in the pocket book, it is personal. Congratulations on developing your own opinion regarding gasoline prices, and be sure to stay tuned as the issue of gasoline is sure to stay in the headlines.