What Affects Gas Prices?

1. What Affects Gas Prices? Click for sound! Diana Rdzanek Energy Law Professor Bosselman December 7, 2010

2. Gas prices are always changing, but why? I’ll bet this helpful power point presentation will tell me more!

3. Major Factors that Affect Oil Prices • Economic Factors • Environmental Factors • Political Factors • Other Factors

4. Economic Factors Supply and Demand • Prices of commodities depend on supply and demand • This particularly applies to finite resources like oil • But what changes supply and demand?

5. Economic Factors • Global Oil Demand • Oil demand is a function of income and price • Demand does not change quickly, especially in the short run • Projections for Oil Demand • Look at the relationship between oil demand, prices, and income to project future oil demand growth Sound 1 Sound 2

6. Economic Factors • Global Oil Supply • Modeling and predicting oil supply is much more complex • Major uncertainties • Geopolitical factors, supply chain disruptions, environmental disasters, technological breakthroughs • Unpredictability of OPEC behavior and long-term price and income information affecting demand • Disagreement over the actual amount of reserves available

7. Economic Factors • Global Oil Supply: Role of OPEC • OPEC acts as swing producer equilibrating demand and supply OPEC acts as swing producer equilibrating demand and supply with optimal prices/quantity levels with optimal prices/quantity levels 1 2

8. Economic Factors • Supply-Demand Limitations • Hard to project oil prices in anyeconomic framework • Mistakes result from number of reasons • Must make many assumptions • Cannot predict unexpected shocks • Non-neutral context • Unpredictable environmental (part II) and political (part III) factors

9. Environmental Factors • Unpredictable geological and events can affect oil prices either positively or negatively • Short-term and long-term impacts • Two Examples: • Increase oil prices: Hurricane Katrina • Decrease oil prices: Eyjafjallajkull eruption

10. Environmental Factors • 2010 eruptions of Eyjafjallajkull • The Geological Event • Seismic activity begins at end of 2009 • March 20, 2010: small eruption begins • April 14, 2010: eruption enters second phase • 250,000,000 cubic meters of ash and tephra ejected intp atmosphere • May 21, 2010: second phase subsides • May 24, 2010: eruption is limited to water vapor • October 2010: eruption declared officially over

11. Environmental Factors Composite map of volcanic ash cloud spanning April 15 - April 25, 2010

12. Environmental Factors • 2010 eruptions of Eyjafjallajkull • The Air Travel Disruption • Volcanic ash is major hazard to aircraft • Ash cloud leads to closure of most of Europe’s airspace • Highest air travel disruption since the Second World War

13. Environmental Factors • 2010 eruptions of Eyjafjallajkull • Effect on Oil Prices • Unburnt fuel from canceled flights - changes supply and demand • Consumption reduced by 1m barrels per day • Jet fuel stockpile increases by 5m barrels • Oil prices seesaw

14. Environmental Factors • Hurricane Katrina • The Weather Event • August 23, 2010: Tropical Depression 10 forms over southeastern bahamas • August 24, 2010: system upgraded to tropical storm and given the name “Katrina” • August 25, 2010: system becomes Category 1 intensity hurricane, makes landfall in Florida • Storm enters Gulf of Mexico, reaches Category 3 • August 27, 2010: hurricane doubles in size, and reaches Category 5. • August 29, 2010: Katrina makes second landfall in Gulf of Mexico in Louisiana/Mississippi

15. Environmental Factors • Hurricane Katrina • The Fallout • Storm interrupts production and importation • Power outages cause distribution problems • 20 offshore platforms missing, sunk or adrift

17. Environmental Factors • Hurricane Katrina • Gas prices go up • August 30, 2010: prices rise over 50 cents per gallon in 24 hours • Long lines at gas stations • Crude released from Strategic Petroleum Reserve

18. Environmental Factors • How do changes in oil prices affect the environment? • Disadvantages • Increase in price of oil drives utilization of fossil fuels • Greater investment in tar sands - pollutes the environment • Shell and BP produce oil from tar sands at $40/barrel and sell for much greater profits, at expense of environment • High gas prices result in greater use of coal - worse for environment • Fewer geopolitical risks with coal

19. Environmental Factors • How do changes in oil prices affect the environment? • Advantages • Consumers switch to alternative fuels when gas prices are high • Wind, solar power, ect. - better economic option • Rising oil prices encourages recycling • Nuclear power option considered more when oil is high • Better for environment balanced with apprehensions of safety and concerns about waste disposal

20. Political Factors • World politics are one of the more volatile factors that affect the oil trade, and prices at the pump 1 2 3

21. Political Factors • World-wide effects: • Venuzuela, December 2002: general strike wipes out two months of oil production • Iraq, March 2003: invasion of Iraq drops production from 2.5m to 500K b/d • Nigeria and Russia: politics interrupts and reduces oil supplies

22. Political Factors Parties within the US disagree about what to do with our oil reserves, developing renewable energy, and becoming energy independent. 1 2

23. Other Factors • Taxation • Takes take up a significant portion of what makes up the price of a gallon of gas • Varies from state to state and locally • Local market conditions • Competition between providers • Foreign exchange • Geographic location

25. Conclusion • With so many factors affecting the price of oil, gas prices will continue to fluctuate