ECONOMICS 310

With our struggling economy, Americans are more sensitive to inflation in commodities.
One of the largest microeconomic issues we continually struggle with, is the steady increase in
the price of gas. A few determining factors that affect the price of gas are oil prices, supply and
demand, inflation, and taxes.
According to the US Department of Energy, the price of crude oil averaged 68 % of the
average retail cost of gasoline in December of 2010(INV, 2013). Between 2000 and 2007, the
price of crude oil averaged 48 % of the average retail cost of gasoline (INV, 2013). In an article
on About.com, it was determined that high oil costs account for 72 % of the price of gas. The
same article also mentions that prices of gas are bid on by commodity traders. During Spring and
Summer season, when we usually see the highest increase in gas price, traders bid up the highest
price for future markets which results in consumers suffering the inflation. A simple breakdown
of this process is that oil and gas prices are based on supply and demand. Price depends on
what investors think the price of oil and gas will be in the future (Amadeo, 2014). They rely on
pattern that would cause changes to supply and demand.
The price of oil is a microeconomic factor that compares to the fluctuatuion of gas prices
because as the supply for oil decreases, the demand for gas becomes more expensive. Oil comes
into several combinations, the most common is light or sweet crude. This type of oil is high in
demand because it contains fewer impurities and takes less time for refineries to process into
gasoline (INV, 2013). As oil gets thicker or heavier, it contains more impurities and requires
more processing to refine into gasoline (INV, 2013). This type of oil used to be widely
available in the past but as the supply becomes more constrained, the price starts to increase. The
contrasting factor is the demand for gasoline. With the supply of oil being less available, more
people are in demand for gasoline. Our population constantly increases and more people are

ECONOMICS 310

using transportation. The expansion and development of our world is requiring more of our
natural resources but the conflicting factor is depletion of these resources. An example of one of
the causes of limited oil is the war in Iran near the straitz of Hormuz. The website About.com
mentions that 20 % of the worlds oil flows through this checkpoint bordering Iran and Homan
(Amadeo, 2014). An article on Time Business and Money reported Iran which just completed
naval exercises in the Persian Gulf, has threatned to close the strategically important Straitz of
Hormuz through which 20 % of the oil flows (Gustin, 2014).
Concisely, an added factor that affects prices of gasoline are inflation and taxes.
Inflation is the general rate at which prices of goods/ services are rising and conversely the rate
at which purchasing power is falling (INV, 2013). Level of inflation varies with different
countries which also affects gas prices. Assumingly, the cost of gas per gallon has increased over
time with inflation. In comparison, taxes are also rising at the same rate. It is said that the tax on
a gallon of gas in 1950 was approximately 1.5 % of the price (INV, 2013). Another statement
said is in 2011 federal, local, and state tax has increased to 20 % of the total price (INV, 2013).
With inflation and taxes added on the price of gasoline, supply and demand has been greatly
impacted.
In reitiration, fluctuation of gas price is a microeconomic issue that we will
continue to battle as long as there is increasing demand from the expanding population. With
limited resources in the supply of oil, the continuing epidemic of steady increase in gasoline will
soon cause macroeconomic issues indefinitely.

ECONOMICS 310

References
Amadeo, K. (2014). NEWs & Issues. Retrieved from ABOut.com:
http://useconomy.about.com/od/commoditiesmarketfaq/p/high_gas_prices.htm
GUStin, S. (2014). TIMe Business & Money. Retrieved from TIMe Business & Money:
http://business.time.com/2012/01/03/u-s-stocks-rise-on-strong-economic-data-oil-jumpson-iran-threat/
Gustin, S. (2014). Time Business and Money. Retrieved from Time Business and Money:
http://business.time.com/2012/01/03/u-s-stocks-rise-on-strong-economic-data-oil-jumpson-iran-threat/
INV. (2013). INVestopedia. Retrieved from INVestopedia:
http://www.investopedia.com/articles/economics/08/gas-prices.asp

ECONOMICS 310

References