Cause And Effects On Todays Rising Gas Prices Essay, Research Paper

Cause and Effects on Today’s Rising Gas Prices

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 is that there is little gas left to be discovered. 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.

Natural Gas Week (see note)

I am presenting an informal study on the cause and effects of today’s rising gas prices. There are two views as to the cause to these skyrocketing gas prices. The newspaper articles and The Associated Press are linking the problems to the “Organizational of Petroleum Exporting Countries (OPEC) cutting its crude oil production by roughly 8 percent last spring”. This statement is true but there is a reason behind OPEC’s decision to decrease production. This reason ties into the second view as to the cause of rising gas prices. As I had suspected all along, the reason for the increase is a slowing in production that is directly linked to the changing industry and technological standards. There’s a new kind of business in town and its name is electronic commerce (e-commerce or e-business). One of the basic fundamental principles of e-commerce is the just-in-time practice.

Proctor & Gamble founded just-in-time practices. “As part of the Efficient Consumer Response (ECR) program, (developed by the grocery industry) consumer packaged goods giant Proctor & Gamble, with headquarters in Cincinnati, Ohio, developed a continuous replenishment program (CRP) that gained industry wide attention. CRP eliminates unnecessary cost, such as warehousing and handling, by keeping products moving through the supply pipeline instead of storing them in warehouses or distribution centers”. The shipments are tracked by a timely, paperless flow of information known as the transaction processing system (TPS) and are delivered on a just-in-time basis. This strategy saves money by lowering inventories and administration cost, while reducing warehouse space.

The Gas Research Institute (GRI) observed this new trend. GRI’s Baseline Projection makes three key observations about trends in energy markets, here are the two that pertain to gas prices:

“Gas supply will increasingly rely on higher production from the deeper waters of the Gulf of Mexico and increased Canadian imports. These two sources will become the pillars of supply necessary to meet growing gas demand. However, they will aggressively compete with each other to provide the incremental supply and to meet demand in specific regional markets. The outcome of this competition will depend on the availability of pipeline capacity, the cost to develop the resources, and, ultimately, price competition.

Natural gas producers will increasingly implement “just-in-time” development practices that will allow the gas production industry to reduce risk and quickly monetize in-ground natural gas resources. This change in production methods implies lower resource/production (R/P) ratios, which could pose supply reliability issues and increase the risk of price volatility. However, the new approach benefits customers by offering lower average costs.”

As predicted, the new approach has indeed, created supply reliability issues and price volatility. I had suspected this was the cause all along. In my Information Technology class, I was taught the theory of just-in-time practices. It was predicted that all major companies in any industry, world wide, would turn to these practices because of the development of electronic commerce (e-commerce). In order for businesses to stay competitive, they must employ just-in-time practices that will allow the use of today’s technological advancements and its benefits.

The problem that we may be having now is the lack of progress in smaller companies to jump on the e-commerce bandwagon. Developing this process can be very expensive. For smaller companies it can be extremely difficult for them to obtain the resources for competitive business with larger companies. This situation leads to inconsistencies in the industry. These problems will no doubt be prevalent in a newly employed technique. This could be the actual cause in the delay of April’s oil shipment. But, if my theory is correct it will get here, “just -in-time.

Although the reasons have been explained, the impacts of cutting production are of great concern to many these days. To many it means, “just-in time” enough to start a panic.

It seems as if everyone is being effected by the rising gas prices. ” High oil prices affect American farmers, truckers, airlines, manufacturers, and even blue-chip companies such as Procter & Gamble Co, which lost billions in market value on Wednesday after it said earnings would be hurt by fuel costs.

“For motorists, the report s implications are bleak. Americans are already paying nearly $1.50 for a gallon of gasoline, compared to prices of less than $1 last winter. Average U.S. retail gas prices of $1.80 and even $2 per gallon are looming on the horizon, warned Roger Diwan of the Petroleum Finance Company, a consultancy based in Washington.”

“It remains to be seen whether this will affect summer travel,” said Norma Cooper, a spokeswoman for the AAA-Chicago Motor Club. But “this is cutting into discretionary income that some folks might have. We just have to make wise decisions on travel.” (See note 1)

The rising gas prices have also affected the trucking industry. Many have complained about the prices and have even protested on the nation highways by driving at dangerously slow speeds. This protest tactic was quickly deterred as law enforcement officers started to enforce sanctions against the drivers.

Another place where the gas prices are showing their toll is in the Gore-Bush campaign. There were several articles about the negative affects the gas prices were putting on their campaign funds. In all the gas hike is part of a trickle down theory. It will soon (if not already) effect us all.

Although, I suspect talks will go back and forth about gas prices and production, to will eventually stabilize when everyone realizes the new just-in-time standards. In the meanwhile, we will continue hear about,” Congressional anger over the threat of higher gasoline prices has prompted a variety of proposals, ranging from suspending 4.3 cents per gallon of the federal gasoline tax to opening up an Alaskan wildlife refuge to oil drilling. “(See note 4)

Maybe we, as Americans are just spoiled. According to some, we are lucky to have prices so low. In some places in the world gas prices are over $5. Another point of view given by economist state:

“Despite wallet-shrinking prices at gas stations nationwide, history suggests the current record price per gallon is not unusually high when adjusted for inflation. According to government figures and those of the American Petroleum Institute, a trade group, the last two years have brought the cheapest gasoline on record after inflation. Gas in 1981 was priciest, at an equivalent of $2.47 in today s dollars. The API s calculation of Energy Department figures using the government s Consumer Price Index shows the February average of $1.44 per gallon is just a penny higher than the real-dollar equivalent of what drivers paid in 1972, when gas sold nominally for 36 cents.

In all it is not certain, if the publics feelings are a perceived panic or if they have just cause for their worries. Many suggestions have been made and many opinions have been given. We will not know the outcome of this situation for months or maybe even years.