market structures of the wholesale as well as retail gasoline markets

 market structures of the wholesale as well as retail gasoline markets

Introduction

It is worth noting that gasoline prices rise or fall primarily as a result of changes that are experienced in the global crude oil market. This implies that changes in gasoline prices, to a great extent, mirror those of crude oil prices, which are determined or in other words, influenced in the global crude oil market by the worldwide demand for as well as the supply of crude oil. As such, it becomes proper to realize that the price of gasoline is greatly determined by supply and demand. As demand increases or supply decreases, the price of gasoline increases. On the other hand, as demand decreases or supply increases, the price of gasoline in the market decreases. However, other factors tend to influence gasoline prices. This paper is focused on exploring the market structures of the wholesale as well as retail gasoline markets, considers how these market structures affect gasoline prices as well discussion of some other factors that affect gasoline prices.

Market Structures

When it comes to the petroleum industry, gasoline markets have, for a long time, been a focus of intensive research. As far as this is concerned, it becomes of great significance to note that the retail market structure of gasoline illustrates many features of a perfectly competitive market. For instance, there exists many buyers as well as sellers and, in the most part, customers in the country have perfect knowledge about the gasoline market. The gasoline market, especially when it comes to the retail sector, has over the years been focused on embracing this hypothetical market where competition tends to be at its highest possible level. According to neoclassical economists, having the retail gasoline market as a perfectly competitive market is ideal as it produces the best possible results for customers, including society. Additionally, it is imperative to realize that in this market, there are no barriers to entry into or exit out of the market. It also implies that no single retailer can influence the market price or even market conditions. As such, these gasoline retailers are perceived to be price takers, and this is primarily because they take their price from the whole industry. No retailer can increase gasoline price independently as doing so will imply that it will not sell. Any significant change occurs in the entire market, something that is influenced by demand and supply or various other factors.

The market structure of the wholesale gasoline market tends to depict the structure of an oligopoly. In this case, it becomes essential to realize that an oligopoly refers to a market structure where there exist a few dominant firms whose behavior is perceived to be interdependent. Additionally, there are a few dominant firms relative to market size, and each one of them commands a large proportion of the market share, something that makes them have strong monopoly power. Excellent examples of gasoline companies in the United States include Shell Oil Company, Hess Corporation, Kwik Trip, Exxon, Mobil, and USA Gasoline, among many others. The fact that there are high barriers to entry makes gasoline wholesalers stand in a better position to retain their supernormal profits in the long run. It is worth noting that in the market, sellers, as well as buyers, tend to have incomplete information concerning production methods, including prices. In addition, it is important to remember that as a result of the small number of competitors in the market, each action taken by any petrol organization in the country will, to a great extent, affect all the other firms in the market significantly. However, rivals’ actions cannot be taken lightly or ignored primarily because they are likely to result in adverse effects. Just like with a monopoly, the imperfect knowledge greatly acts as a barrier to entry of potential new wholesalers.

Market Structures and Gasoline Price

As seen earlier, the retail market of gasoline appears to embrace a perfectly competitive structure. Even no single retailer can influence the price, demand and supply play a tremendous role in determining the price of gasoline. This is primarily because when it comes to a perfectly competitive market, the price of gasoline is, to a great extent, determined by the intersection of market demand as well as market supply. It is to imply that once the market price of gasoline has been established by market supply and demand forces, retailers become price takers. In this case, these retailers are highly forced to charge the equilibrium price of the market. In simple terms, the demand curve of a single retailer is equal to the equilibrium price of gasoline in the market. On the other side, the oligopoly market structure that represents the wholesalers of gasoline also plays a great part in determining gasoline price. Every wholesaler ought to properly assess or predict the actions of rivals to their pricing strategies. As far as this is concerned, it becomes proper to realize that if a wholesaler decides to raise its price to go above the equilibrium price, it presumes that rivals are unlikely to follow. It is to mean that the quantity demanded for its gasoline will fall, and this is by more than proportionate. Therefore, above the equilibrium price, the demand is described as price elastic. However, if a wholesaler decides to reduce its price below the equilibrium price, it assesses that rivals will without hesitation match its price reduction, something that will result in demand for its gasoline rises, and this is with the price-inelastic demand.

The Organization of the Petroleum Exporting Countries (OPEC) happens to be a group comprising of fourteen of the world’s primary oil-exporting countries. It is worth noting that OPEC also plays a great role when it comes to determining gasoline prices. It has for a long time aided to set gasoline prices, and it still exists as a primary factor in determining how much one has to pay at gasoline station despite United States shale revolution. The role of OPEC has in the last couple of decades revolved around working with member countries as well as nonmembers with the sole intention to coordinate production as the means to assist support gasoline prices. It is to say that OPEC has a great responsibility of ensuring that it coordinates and unifies gasoline policies and stabilizing gasoline markets to secure an efficient, economic as well as regular supply of gasoline to customers. It is also in place to prevent crude prices from getting too low or even too high. However, studies show that OPEC has not been that effective in meeting its goals. There are times that it has let gasoline prices spike. For instance, during the Arab-Israel War that transpired in 1973-1974, OPEC’S Arab associates imposed what can best be described as an embargo on the United States over its support of the Israeli military. This is something that quadrupled gasoline prices hence resulting in gasoline shortages. Additionally, it is essential to remember that gasoline prices are still being set by global markets meaning that OPEC will continue being appropriate in a post-shale revolution world.

Other Factors Affecting Gasoline Prices

It is significant to note that change in the demand for gasoline is, to a great extent, influenced by the number of individuals who are utilizing the fuel when it comes to transportation. As far as this is concerned, it becomes proper to realize that the rise in the number of individuals driving cars as well as trucks in the US and across the world has expanded intensely in the last couple of years. India and China, for instance, have a population in excess of one billion and they are greatly experiencing as well as expanding middle class, something that will likely trigger the use of more vehicles hence more gasoline consumption over time. Research indicates that China is working on a project that will ensure that the country builds forty-two thousand miles of new interprovincial express highways as the means to accommodate all the new car sales in that nation. In contrast, the United States has about eighty-six thousand miles of intersecting highways. All cars that drive in these highways end up consuming more gasoline. It is essential to remember that various nations subsidize the retail price of gasoline with the sole intention to encourage industrial development as well as obtain the popular support of individuals hence generating artificially higher demand for gasoline. This is to say that such changes trigger an increase or decrease in gasoline price.

Additionally, it is essential to note that crude oil has been identified as a major driver of gasoline prices. This is in the sense that two-thirds of gasoline price is as a result of crude oil as well as refinery costs. The fact that the price of crude oil happens to be a major driver of gasoline prices means that trends in crude oil prices are, in a great way, connected to the trends in prices of gasoline. Therefore, if the price of crude oil increases, the price of gasoline is likely to increase. On the other hand, if the price of crude oil falls, then the price of gasoline is likely to fall. If the demand of crude oil increases, the price tends to increase, something that will be felt in the price of gasoline. Additionally, it is necessary to remember that governments around the globe tend to have a strong influence on gasoline reserves, including production. Based on this reason, political influences frequently trigger gasoline prices to either increase or decrease.

Conclusion

Gasoline markets have, for a long time, been a focus of what can best be described as intensive research. As seen in the paper, the retail market structure of gasoline illustrates many features of a perfectly competitive market. For instance, there exists many buyers as well as sellers and, in the most part, customers in the country have perfect knowledge about the gasoline market. According to neoclassical economists, this market structure is ideal as it produces the best possible results for customers, including society. On the other hand, the market structure of the wholesale gasoline market tends to depict the structure of an oligopoly. These markets, demand and supply, as well as various other factors, play a great role when it comes to determining gasoline price.