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Oil Demand and Supply Factors

Prices of Gasoline tend to fluctuate through the year often by huge jumps or falls. Crude oil is also the world’s largest traded commodity and has the distinction of having few supply centers while demand is global. The cost of crude oil is perhaps the largest factor which influences the price at the fuel pump. This product does not have any substitute and is hence a monopoly of sorts. Substitutes which are available are neither affordable nor available to the common man as of date such as electric cars

Political instability and economic upheavals have been responsible for the increase in prices in the last two years. While demand is increasing, supply is either stagnant or declining even with the use of advanced technology and enhanced recovery programmes. Worldwide countries are increasing their focus on finding new sources of Oil & Gas and becoming self suffident. As the commodity is available only with a few and countries are largely import dependent, this move to self stuffiness would have a positive impact on the GDP of the importing countries.

However this move would also mean that each country would price differently and countries with excess production would export and the cycle would start again , with emergence of cheaper imports resulting in lower prices and vice versa. At this point in time supply and demand is tenaciously balanced as most of the oil producing companies are located in what the US of A terms are politically unstable.

The ongoing tensions between these countries and USA are causing supply to fluctuate worldwide. This is also causing rapid movements in the values of the Dollar causing it to fall as against other currencies, in other words the “$” does not have the purchasing power like before. Crude oil prices form the most significant portion of petroleum/gasoline prices ( almost 50%) hence a marginal increase in crude oil price will result in a jump in the retailing price of gasoline.

Other factors which would affect the demand for gasoline are the complementary services or offers designed by various companies. As the product price is essentially in a manner controlled the retailing companies play with price offers in conjunction such as loyalty card point schemes, food court schemes and tie ups with automobile manufacturing /service companies. The economy is also expanding rapidly worldwide and this is causing the biggest increase in oil demand in the past decade (EIA).

Countries such as China and India are seen to strengthen their economy besides having the largest population base and are hence becoming the biggest demand centers. In any market the imbalance between supply and demand causes prices to be affected in the short term such as technical problems in production , foreign exchange fluctuations , distance between the demand and supply centers and local competition.Taxations and government policies also shape the demand and supply balance for gasoline.


1. Motor fuel Pricing Factors, Tax Structures And Other Related Issues ,Commission on Government Forecasting and Accountability, 2005 Edition http://ilga. gov/commission/cgfa2006/Upload/FY2005MotorFuelRpt. pdf 2. Scott, Horsely. “Q&A : Whats behind High Gas Prices? ”,NPR , May 11 2007 http://www. npr. org/templates/story/story. php? storyId=5365439

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