The industry chosen to research is the Gas industry. I chose to research the affect of
the war on gas prices in the US. My sources for this paper are Just before war: Price of
Oil Hits 26-Month High after Bush's Comments on Iraq and Global thirst, fears keep
gas prices high.
In my chosen industry, the Gas industry, price elasticity of demand is considered
inelastic, although prices are high fuel is still in high demand due to few readably
available substitutes. "The price elasticity of demand measures how much the quantity
demanded responds to a change in price."(Mankiw, 2004)
There are substitutes available but there are not many or well developed. Gas and
crude oil is still the major source for energy. The available substitutes are solar energy,
ethanol, public transportation, moving closer to work, buying more fuel efficient cars,
and hybrid vehicles which run on electricity thereby reducing the need for large amounts
of gas.
Most would consider gas as being a necessity. Fuel for heating is a basic need for
everyone and driving is considered a basic need for people of age.
The price elasticity of supply for the Gas industry is still elastic as crude oil and gas are
still the number one source for energy in the US and globally. According to the CNN
article Global thirst, fears keep gas prices high "An Interconnected set of domestic and
international factors have pushed gas prices steadily higher over the past few years,
and an almost unquenchable global demand for energy may keep them there for at
least the short term, industry observers say. " (Tanneeru, 2006) As well as an article
Just before war: Prices of Oil Hits 26-Month High after Bush's Comments on Iraq
quotes: "The Iraq war was part of the cause of high oil and gasoline prices. The
markets anticipated a disruption of oil supplies, as proved by the impact of Bush's
speech." (Bloomberg News, 2003)
The concept of supply and demand is common knowledge; however the specifics of
price elasticity are quite interesting. Especially as it pertains to the Oil/Gas industry and
gas prices, one can relate to this industry on a personal level as it affects their selves
and members of their family directly and indirectly it is good to have more insight into
the daily issues that we face in respect to gas prices.
Yes the transaction of a buyer and seller directly affects the third party, in this case
the consumer. Due to the war and the growing global need for fuel, the cost for crude
oil goes up which causes consumer costs to rise. This would constitute a negative
externality.
The Gas industry is a resource that is excludable. As the world supplies of natural
gas and crude oil continue to diminish and the need continues to grow, areas that are
still rich in crude oil are becoming more and more controlled and governments continue
to withhold drilling rights as well as allowing consumers access to their oil reserves. We
see evidence of this now in the Middle East and the gulf wars; where governments
refused to sell oil to other countries.
Wage inequality is the difference between the rich and the poor and the factors that
lead to this divide. Mankiw (2004) states "The gap between rich and poor is a
fascinating and important topic of study-for the comfortable rich, for the struggling
poor, and for the aspiring and worried middle class (p. 429)."
The most current and ongoing news event related to wage inequality in the Oil/Gas
industry would be the war in Iraq. Corporations and Oil companies are making millions
off of the war. According to Spencer (2006) "Since September 11, 2001, and the Bush
administration's initiation of the "war on terror," inequality in the US has grown at a
rapid rate and to grotesque proportions (para. 1)."
After 9/11, pay levels of defense and energy CEOs soared. According to the IPS, CEOs
of the top 34 defense contractors saw their average compensation double, from $3.6
million in 2002 to $7.2 million in 2005. Since September 11, these 34 executives have
pocketed a combined total of nearly a billion dollars, which the IPS estimates would be
"enough to cover the entire wage bill for more than a million Iraqis for a year." Average
defense CEO pay was 308 times the pay received by a deployed US Army private in
2005, $25,000 (para. 5).
The industry's method for determining that there was an inequality was discussed
Spencer (2006) when she states "Results of "Executive Excess 2006," the thirteenth
annual chief executive officer compensation survey by the Institute for Policy Studies
(IPS), underscore the fact that the war has benefited a very few to the detriment of the
broad mass of the population, both domestically and internationally. (para. 3)." Though
specifics are not given on what the survey covers. Inference may be made that it
would involve calculating income earnings for Oil/Gas corporations and that of the
average laborer.
Svensson 2006 "So, the principles of good monetary policy are simple: Perform
flexible inflation targeting, which means aiming to stabilize inflation around an explicit
low positive numerical inflation target with some weight also on stabilizing the real
economy (para. 2)." Employment rates drop for the Gas Industry due to policies that
are being made. Since gas and oil prices are on the rise and natural resources are
diminishing not to mention the war in the areas where gas and oil production is most
prominent. Svensson 2006 "Rising oil prices may both increase inflation and reduce
output and growth. How should central banks adjust monetary policy to oil-price
movements? The demand for employment would reduce in direct proportion to the
rising costs to produce the oil/gas (para. 1)."
Energy Information Administration 2007 "Since August 1996, the Iran-Libya
Sanctions Act (ILSA) has imposed mandatory and discretionary sanctions on non-U.S.
companies that invest more than $20 million annually (lowered in August 1997 from
$40 million) in the Iranian oil and natural gas sectors (section 2.7)."
Although these policies should affect the growth rate negatively, with the growing
need for energy sources and the growing global reliance on gas and oil that the growth
rate is increasing substantially; which will cause a major energy crisis that is already in
the making. Energy Information Administration 2007 "U.S. natural gas consumption
and imports are expected to expand substantially in coming decades, with the fastest
volumetric growth resulting from additional natural-gas-fired electric power plants.
Increased U.S. natural gas consumption will require significant investments in new
pipelines and other natural gas infrastructure (section 3.2)."
According to the article Survey of economic and social developments in the Economic
and Social Commission for Western Asia region 2004 "Oil prices rose in 2003, along
with oil revenues and economic growth in oil-exporting countries, all of which is
reminiscent of what occurred in the last Gulf War and the war before (para. 1)." Based
on this research and personal experiences one could speculate that these policies have
affected the price of the product negatively by causing it to rise astronomically. One
could remember a time when gas prices were under a $1 a gallon, now they are a
steady climb to almost $3 a gallon, over $3 a gallon in some states.
I have noticed a running theme throughout my research of this industry and that
appears to be the war with Iraq coupled with the adverse effects of violent weather
have had major impact on the Gas and Oil Industry. War time has a major affect on
economic outcomes globally and specifically the Oil/Gas industry. Especially as it
concerns a country where most of the world crude oil comes from; so naturally this
would affect the wage inequality. Adverse weather conditions, specifically hurricanes,
also play a major role in affecting the Gas and Oil industry, because most of our oil
reserves are located in states that are directly affected by hurricanes reduced reserves
can be expected. Energy Information 2007
"According to the Energy Information Administration's (EIA) 2004 Annual Report on
U.S. oil and natural gas reserves, the United States had 21.4 billion barrels of proven oil
reserves as of December 31, 2004, the eleventh highest in the world. These reserves
were concentrated overwhelmingly (over 80 percent) in four states. Texas had 22
percent of total US oil reserves, Louisiana had 20 percent, Alaska 20 percent, and
California 18 percent (note: all of these figures include onshore plus Federal and state
offshore reserves). U.S. proven oil reserves have declined more than 17 percent since
1990, with the largest single-year decline (1.6 billion barrels) occurring in 1991
(section 2)."
References
Energy Information Administration. (2007). Energy profile of the United States.
Retrieved November 4, 2007, from
http://www.eoearth.org/article/Energy_profile_of_the_United_States#citation
Energy Information Administration 2007 gives an over all profile of US energy statistics
and details. This article gives a break down of the demand of energy consumption,
different policies affecting and where each area of energy is consumption is going to.
Heuvel, K. (2006). Class Warefare: The Minimum Wage Goes Down. Retrieved
October 11, 2007, from http://corporationscreatefascism.blogspot.com/
In this article Heuvel (2006) talks about the bill to raise the minimum wage, She
writes about the bill being denied and the reasons for the denial. The article also details
what the benefits of this bill would have been and discusses how even though the raise
in minimum wages didn't go through a raise in lawmakers salaries did. Finally it goes
into the reasons why the bill was not approved and what this will mean for the
economy and the wage inequality.
(2003). Just before war: Price of Oil Hits 26-Month High After Bush's Comments on
Iraq. Retrieved September 13, 2007, from http://zfacts.com/p/377.html.
Just before war: Price of Oil Hits 26-Month High After Bush's Comments on Iraq.
discusses the impact of President Bush's comments on Iraq just before the war began
and the ‘US's low inventories of heating oil and gasoline' on the price of gas. The article
also sites that a Man financial energy broker about the rates of supply and demand
going into the war. Statistics on crude oil costs are listed for the US and England citing
demonstrating how much of an impact the war was would have on the price of crude
oil. Predictions are made of on how much gas prices will rise and what they are
expected to peak at. Finally the article concludes that even if international prices
improve their will still be an increase in price of gas.
Mankiw, N. G. (2004). Principles of economics (3rd ed.). Chapter 5 Elasticity and its
application. Chicago, IL: Thomson South-Western.
Rivlin, A.M. (1983). Natural Gas Pricing Policies: Implications for the Federal Budget.
Retrieved October 25, 2006, from http://www.cbo.gov/ftpdoc.cfm?
index=5052&type=0
Rivlin 1983, gives an overview of the impact of a 1978 Natural Gas Pricing Act. In
the article the author discuss the ill effects of the act and what it was supposed to do.
The author also examines the policies from the angle of the Federal Budget and the
impact it will have.
Spencer, N. (2006). US Defense And Oil Company Execs Reap Windfall From Iraq War.
Retrieved October 11, 2007, from http://www.countercurrents.org/iraq-
spencer160906.htm
In this article Spencer (2006) discusses how the war on Iraq has turned into a
lucrative business opportunity. She discusses how corporations are viewing the war as
an opportunity to build business and make a profit. The articled goes on to detail how
the war has been used as a get rich steam engine and exactly what the damage this is
causing to the world economy and morally.
Stavins, R. (2004). A Tale of Two Taxes, A Challenge to Hill. The Environmental Law
Institute. Retrieved September 27, 2007, from http://www.env-
econ.net/stavins/Column_4.pdf
In the article A Tale of Two Taxes, A Challenge to Hill (Stavins, 2004) discusses the
tax on Gas prices to the consumer. The Article goes into details on what the affects
that taxes will have on the true issues of energy saving strategies as well as
environmental issues. Stavins goes on to give statistics on what the proposed tax is
supposed to benefit and reduce gas consumption.
Svensson, L. E.O. (2006). Monetary-Policy Changes: Monetary-Policy response to Oil-
price changes. Retrieved November 4, 2007, from
http://www.princeton.edu/svensson/papers/Bellagio601.pdf
Svensson 2006 discusses what makes good monetary policy and the principles that
should guide them. He discusses the basic principles and how to apply them to making
monetary polices in relation to the Oil and Gas Industry.
Tanneenu, M. (2006). Global Thirst, Fears Keep Gas prices High. Retrieved September
13, 2007, from
http://cnn.worldnews.printhis.clickability.com/pt/cpt?action=cpt&title=CNN.com+-
+Glob.
Global Thirst, Fears Keep Gas prices High starts of with history of gas prices and basic
statistics of gas price spikes. The article also details the prices and statistics for crude oil
prices. Going into some background on previous periods of major inflation the article
gives statistical data on comparison between then and now. The article also gives
details on why the oil prices have been increasing due to issues of global supply and
demand, citing that other countries previously not consumers of oil are now facing
increased needs in energy. The article goes on to discuss the impact war, and fighting
have on the current fluctuations on gas prices and what the long term effects might be.
The article then goes into spare reserves and how they are dwindling and finally
concludes with a look to the future of gasoline prices and how the global economy will
be effected.
There's Not Enough Free Enterprise. United Oil and Gas Consortium Management,
Corp. 2006. Retrieved September 27, 2007, from http://www.unoilgas.com/not-
enough-free-enterprise.htm
In the article There's Not Enough Free Enterprise, (2006) the author speaks about how
government run oil production cannot afford to run the production of oil resources. The
article also says that government corruption also hinders the production of oil, and that
when there is so much need for energy resources in this day and age it does not do
well to give the government control over production of these natural resources.
United Nations: Economic and Social Council. (2004). Survey of economic and social
developments in the Economic and Social Commission for Western Asia region 2004.
Retrieved October 25, 2007, from http://64.233.169.104/search?
q=cache:M9EnOBeoLe0J:www.un.org/Depts/rcnyo/newsletter/survs/escwasurv2004.
doc+How+have+monetary+and+fiscal+policies+affected+the+employment+rates+
for+the+Oil/Gas+industry%3F&hl=en&ct=clnk&cd=8&gl=us
A survey on economic and social developments in the Economic and Social
Commission for Western Asia region 2004 discusses the Gulf war's impact on the Oil
and Gas industry; further detailing the rise in cost of the production of Oil and Gas. The
article discusses how short-lived the rise in prices also created a short-lived positive
effect.
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