A discussion about the relationship between the retail price of gasoline and the world demand for crude oil.(based on Marathon’s product process)

The production process at Marathon, starts at exploration and production of the cruel oil in the existing core areas on U.S., Equatorial Guinea, Libya and the North Sea, the assets in the Athabasca Oil Sands Project (AOSP), which includes the existing Muskeg River and Jackpine mines, the Scotford Upgrader, and additional prospective acreage in Alberta, Canada give Marathon access to stable, long-life Organization for Economic Cooperation and Development (OECD) production. Natural gas and liquid hydrocarbons Marathon's productions operations activities are currently focused in North America, Africa and Europe that gas business adds value through the development of opportunities created by demand for natural gas. Operating across the globe Marathon is among the world's leading integrated energy companies - applying innovative technologies to discover and develop valuable energy resources, providing high-quality products to the marketplace and delivering value to all of the Company's stakeholders. Refining, Marketing and Transportation are the most visible work of Marathon, after exploration and production of the cruel oil the next operations it is storage the crude oil that happens concentrated primarily in the Midwest, Gulf Coast and Southeast regions of the U.S. after that the crude oil has to be transported to the refineries along the USA they have six-plant refiring network strategically located to serve major markets. In the refineries the crude oil are transformed into gasoline and other petroleum products and then distribuided to the ones of the 1,500 terminals in the US where the light products such as gasoline, diesel, kerosene and jet fuel are typically storage some days before being transported the retail stores this also includes Marathon's wholly owned retail extensive marketing operations subsidiary Speedway LLC, the fourth largest chain of company-owned and -operated retail gasoline and convenience stores in the U.S.

Analyzing the Marathon’s product process above and the global situation with soaring oil prices that are about $ 109.38 a barrel (Reuters 2011) it could be determined that the phase’s open to the greatest number of efficiency improvements would be the refineries process because it becomes important to develop various alternative for the use of gas like the use of clean and renewable energy, such as increased use of alcohol in a gasoline blend in the refineries process. The addition of ethanol would allow the efficient improvement of quality of refined gasoline by Marathon, creating favorable environmental conditions for human life, especially in large urban conglomerates (Pimentel, 2003). For example in Brazil they structured Proálcool program that determines a addition of 20% or 25% of ethanol in the gasoline since the program has avoided emitting 403 million tons of carbon dioxide in the atmosphere between 1975 and 2000, besides contributing to maintaining stable price of gasoline. (Source: UNICA)

Since last year, Americans became the largest producer of ethanol with the use of corn, with the price around $ 1.59 a gallon, but also they can import from Brazil that makes the sugarcane juice around $ 1.21 gallon, but then to import they might will find a big problem with the tariffs importation. (Source: UNICA). To implement this decision they would need to select what supply it is better to buy the ethanol either from US or import and then they can use their own distributions channels as a transportations to transport the ethanol to the refineries with some adaptations they will be able to increase the ethanol in the gasoline about 20% to get a efficient gas.

The price of the gasoline, the increase of the production of ethanol and the environmental benefits make the increase of ethanol in the gasoline strategically investment that will performance in a cheaper clean and renewable energy.

Retail gasoline prices was affected by the recent rapid increase in crude oil and wholesale gasoline prices has led to a significant rise in the retail price of gasoline at the pump. Absent a near-term decline in crude oil prices, motorists currently experiencing a jump in pump prices will likely see further increases from now through the spring since the recent increase in crude oil prices has not yet been fully passed through to retail gasoline prices. EIA expects the retail price of regular-grade motor gasoline in the United States to average $3.56 per gallon in 2011, 77 cents per gallon higher than the 2010 average, and $3.57 per gallon in 2012. EIA projects gasoline prices could exceed $4.00 per gallon during the peak driving season (April through September) in 2011 with considerable regional and local variation.

However the demand for gasoline has been changed in the recent years, recently the U.S. Energy Department announced a decline of 1.6% in a closely monitored measure of gasoline consumption in comparison to 2010. In the past, when American motorists are skittish, it reduced the world oil demand and lowered prices. After a time, lowest prices helped the economy back on track - or at least withdrew a significant obstacle. But many experts believe that oil scenario will not repeat itself this time, because most American drivers do not dictate the pace. The booming economies of China, India, Brazil and even Saudi Arabia are that they do, one possible outcome is a prolonged period of slow growth in the U.S. because of high oil prices. Two nations that were among the least affected by the global recession were China and India, and they continue to lead the world’s economic growth and energy demand growth.

The most rapid growth in energy demand from 2007 to 2035 occurs in nations outside the Organization for Economic Cooperation and Development1 (non-OECD nations). Total non-OECD energy consumption increases by 84 percent in the Reference case, compared with a 14-percent increase in energy use among OECD countries. Strong long-term growth in gross domestic product (GDP) in the emerging economies of non-OECD countries drives their growing energy demand.

In recent weeks, prices have risen substantially because of concern about instability in producing countries in the Middle East and North Africa. Goldman Sachs analysts say this scenario is adding $ 10 to each barrel of oil, but because of the influence of the non-OECD nations, and explosion of demand from China and other emerging economies the demand curve has been shifted indicating that overall demand has increased at every price. In all non-OECD regions combined, economic activity—as measured by GDP in purchasing power parity terms— increases by 4.4 percent per year on average, compared with an average of 2.0 percent per year for OECD countries. Since 2000, U.S. oil consumption fell 4% to 19.2 million barrels per day. In the same period, the combined demand of Brazil, India, China and Saudi Arabia increased by 76% to 18.8 million barrels, China’s oil consumption alone more than doubled its to 9.4 million barrels, according to EIA. Oil prices still have considerable importance for U.S., because over 75% of all American workers drive to work. The high gasoline prices, economists say, reduced consumer confidence and spending patterns change. Until now, there is little evidence that high oil prices will lead the U.S. economy back into recession. Economists see the high price of gasoline increased an obstacle, but not the cause of a new contraction. Still, the apprehension grows (Gold 2011).
Oil market analysts fear that oil prices go high over the next 12 months, even if production resumes in Libya and elsewhere in tension attenuates. Although price is the underline cause of movement along demand curve many factor can combine to determine the overall demand for gas like an existence of little new supply to account for the high demand.

A supply curve shows the relationship between different prices and the quantities that sellers will offers for sale, regardless of demand. So the price rises the quantity supplied rise, lower prices the quantity supplied decrease (Kurtz, 2010). The figure 2 shows that a change in the availability decreased by 10% shift the entire supply curve from S1 to S2.

For Marathon keep the price at the pump the same, or according to figure 2 keep the supply curve at the same position S1, they will needs certain inputs on the factors of production to operate effectively in producing more crude oil to amount the global production decreased, they would find a way to speed up the production levels principal on their developing potential new core areas as Indonesia, Iraqi Kurdistan Region and Poland (that provide more opportunities) , allowing it to turn out more production of crude oil. They could probably do some technologic changes or add some new suppliers in these developing areas in order to increase the production at least 10% more than as it did a time before and then balance the supply curve for gasoline and keep the price at the pump the same price without losing profits.

According to U.S. Energy The United States produce 49% of the petroleum crude oil that are consumed in America and about one-third of U.S. production came from wells located offshore in State and Federally administered waters of the Gulf of Mexico, it is mean that almost 16% of all consume for crude oil are provide in the waters of the Gulf Mexico and most of this oil are refined into gasoline. (EIA).

Since 2000, U.S. oil consumption fell 4% to 19.2 million barrels per day, they began to buy smaller cars that directly providing an improvement in the efficiency of fuel usage in vehicles and also the use of alternative sources of energy, including an increasing supply of natural gas produced domestically, however, oil prices still have considerable importance, more than 75% of all American workers drive to work.

If they continued moratorium on deep-water drilling for retail gas prices in the U.S, it will shift the supply curve from S1 to S2 (figure 2) because it will decrease around 16% the availability of crude oil in U.S. and then it will decrease the availability for gasoline as well raising the prices. If it happened the high gasoline prices will likely reduce consumer confidence and change even more American spending patterns and may slow the country's economic growth, which was already idling and can take back to the recession. The high price of gasoline is a big obstacle, where the greatest risks to the economy are its effect on household consumption. (Gold 2011).

 

References

EIA (Energy Information Administration). Petroleum e other Liquids, May 2011,            (http://www.eia.doe.gov/petroleum/).

Gold, Russell (2011) “High oil prices starting to affect scenario for the U.S. economy” The        Wall Street Journal 28/04/2011.

Kurtz, D. (2010 Update). Contemporary business: 2011 custom edition (13^th ed.). Hoboken,

NJ:         John Wiley & Sons.

Pimentel, D. Ethanol Fuels: Energy Balance, Economics, and Environmental Impact its Are       Negative; Nat. Resource. Res. 2003, 12, 127-134.

Reuters  May 4, 2011 – 11:33 AM ET  “Oil prices fall after bearish U.S. inventory data”            © Thomson Reuters 2011 Posted in: Marketscope  Tags: crude, stockpiles

UNICA (União da Industria de Cana de Açucar) “Ethanol, Sugar and Energy”            http://www.unica.com.br/dadosCotacao/estatistica/