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Everyone's Gasoline Problem

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Everyone’s gasoline problem
The price of gasoline has varied widely from a current low of $3.98 a gallon to a high of $4.21 approximately ten weeks ago. In order to appreciate the reason for this fluctuation it is important to understand that the price of gas, like other commodities, is determined by the relationship of supply and demand. Since gasoline is a relatively inelastic product, the price alone does not have much bearing on the demand. Rather, other non-price determinants such as personal income and product availability play a bigger role in the demand for gas. The recent drop in prices has been largely attributed to a weakening of global demand; particularly the slowdown in Europe’s manufacturing industry. The unemployment rate in seventeen countries that use the euro has increased over the past few months and the United States has added fewer than expected jobs to the economy. These factors have led to a reduction in personal income thereby reducing the overall demand for gasoline.
On the supply side of the equation, price increases earlier in the year were caused by supply interruptions in South Sudan, Syria, Yemen and the North Sea. This reduction in supply coupled with the tightening of sanctions in Iran reduced the number of petroleum sellers in the market causing a price hike at the pump. Consumer expectations of further supply interruptions led to the sustained higher prices.
Being an inelastic product (few substitutes available), the actual retail price of gas did little to change the quantity demanded. Consumers rely heavily on gasoline for their daily commutes and as a result purchases of the product have remained fairly stable. A reduction in prices through a weakening of consumer-driven demand can only be achieved if one of the determinants of demand such as consumer tastes, preferences or income is altered. Given current economic

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