Today's Rising Gas Prices

Today's Rising Gas Prices

At some point in everyone's lives, we are affected by the rising gas prices in today's economy. Natural gas is not a renewable resource, since there is a fixed amount of it trapped in the Earth. However, many people carry the misconception that there is a very limited amount of natural gas, and that we may use all of it up. This isn't true. The gas shortages of the 1970's were prompted by the government's lack of faith in the industry's ability to discover and develop new reserves, not by lack of gas supply. The unfortunate impression left by the shortages of gas in the 1970's caused the people to believe that there was a small amount of gas left. On the contrary, the gas resource base is vast, and probably even larger than currently estimated. People are often confused by the difference in "proved reserves", those that could be economically produced with the current technology, and the total natural gas resource base.

Before the 70's, oil from the Middle East was very cheap, and in North America, it was about $4 a barrel. But then, the leaders of the Middle East discovered that everyone needed their oil, so they formed OPEC (Organization of Petroleum Exporting Countries). Practically overnight, they jacked up the prices of oil by limiting the supply. This was the first oil crisis. It lasted for a while, but then they got greedy, and started supplying more oil, in hopes to make more money. But then there was more supply than demand, so the price of oil started to fall. Just recently, they are getting back together, driving oil prices up again, and making these few countries rich. Inflation can be noticed when the prices of basic

commodities increases such as milk, gas and bread. It is a rise in all prices simultaneously. Inflation is caused when the demand for something exceeds the supply. This causes the price of that particular item to go up which in turn causes wages to go up and operating costs also increase (inflation).

Over the past two years, oil prices have increased very rapidly. "With OPEC production cuts and a growth in crude oil demand," oil prices went from a 25-year low of $11 per barrel in February 1999 to a peak of close to $36 per barrel in December 2003 (Jablon 1). "Some analyst, however, said the cut could soon push crude prices above the psychologically important threshold of $40 per barrel and worsen the pain for U.S. motorists" ("Rising Prices Fuel Gas Clash" 1). During this winter, the price of natural gas has gone through the roof. This brings many questions to mind. Are the companies just raising prices? Is there actually a shortage that is causing the raise in price?

It turns out that the market for natural gas is a very competitive one and that there is in fact a shortage in supply that is causing the price to increase. Natural gas must be drilled for and there are only a certain number of active companies that drill and they all have a set amount of capital. In the short run the supply of natural gas is very inelastic because they cannot just produce more gas. They would need to get more rigs and find more natural gas then drill for it.

There are other reasons for the cause of these skyrocketing gas prices. For one, drive-offs make gas station owner increase their gas prices. Many people don't realize how much drive-offs affect the gas prices. If consumers don't pay for their gas, they leave the business