California Fuel Price Rises Force Pump Closures

        Based on the article from the BBC News US & Canada entitled 'California fuel price rises force pump closures' that written on 5th October, 2012 (http://www.bbc.co.uk/news/world-us-canada-19853740). A sharp rise in fuel prices in California linked to state supply shortages has forced some petrol stations to close temporarily. In one part of the Golden State, prices hit $5.69 a gallon (£0.91 per litre), $1.20 more than the California average. The average fuel prices in California have risen to $4.49 a gallon, becoming the nation's most expensive petrol.

        Due to this incident, the refinery had gone offline because of a power cut, exacerbating the supply problems. Fuel price spikes particularly affect the state's independent petrol station operators, who pay a higher price for their supplies than some national chains. As prices increased over the past week, the California Independent Oil Marketers Association requested a waiver from the state's air board requesting to use the so-called winter-blend before the scheduled 1 November switchover. Besides that, according to the American Automobile Association, petrol prices are still relatively high around the US, averaging $3.79 a  gallon, 39 cents higher than this time last year.

         According to the analysis made by the American Automobile Association, the rising of price for the petrol are relatively high compare to last year. California's record average gas price was $4.614 per regular gallon. According to AAA's Daily Fuel Gauge., that just barely edged out the previous record of $4.610 set in 2008. A rise in the price of petrol brings an increase in the quantity supplied along the supply curve. Petrol is a necessity and less inelastic good which means the demand of petrol will remain unchanged because people that drives car may need it in their normal daily life, no matter how was their income, so the increase of average income does not affect a lot in the demand for petrol. The demand of petrol will not affect, because price increases, only quantity demanded will change, but not demand of petrol. In the other hand, when the range of prices is lower the equilibrium price, shortage arise. Shortage is a situation where the quantity available or supplied in a market falls short of the quantity demanded or required at a given time or price.

         However, people that really could not afford the new fuel price will probably reduce the consumption of petrol. Consumers may reduce the consumption on petrol by driving 3 times in a week compare to the past where they are driving everyday. They may also choose to carpool with their colleagues or friends which stay in the same or nearby neighborhood in order to reduce the usage of petrol. On the other hand, some consumers might prefer to take public transport like bus and train compare to private transport. This will also cause the quantity demanded of petrol to be reduced in a very little amount. By that, the demand for public transport like train and bus will rose.

 Diagram 2.0 shows the movement along the curve from D0 to D1. The quantity demanded of fuel reduces  (From Q0 to Q1) because of  the fuel price increased (From P0 to P1).

                                                                Diagram 2.0

        Moreover, the rises of the petrol price shows the price elasticity of demand which means how quantity demand response to the changes of price (ceteris paribus). The price elasticity of demand means a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. The refinery had gone offline because of a power cut, exacerbating the supply problems means this situation is unit elastic demand which means total revenue remains unchanged.  The changes in price of petrol will possibly affect the supply of petrol. It means increase in demand and decrease in supply. An increase in demand and a decrease in supply raise the equilibrium price. The change in equilibrium quantity is uncertain because the increase in demand increases the equilibrium quantity and the decrease in supply decreases it.

        Some have closed down their pumps rather than cut into profit margins. Here comes the law of the demand that results from the substitution effect. When the opportunity costs of a good or services rises, people seek to substitute for it, so the quantity demanded of the good or services decrease. This means the price of the petrol rises, the quantity demanded for the petrol decreases.  This causes opportunity cost which means as we move down along the production possibilities frontier, we increase the price of petrol, but we can decrease the pumps. The opportunity cost of petrol is the pumps.

        Officials insisted California was not running out of petrol, and one refinery has already resumed production. This situation might cause by the economic growth which consist of two factors which is technologies change or capital accumulation. Price cap will cause petrol shortage. Due to the quantity demanded exceeds quantity supplied, the market is insufficient, hence it is the market failure. For this situation, quantity demand exceeds quantity supply. The maximum price on the black market will increase as well, because people will want to get the goods since supply is limited. Besides, it can be a short-run coast because it is an increase in the price of a factor of production increases costs and shift the cost curves.

        Due to the closures of pumps in California, the insufficient of supply occurs. When supplies decrease, price will increase and amount spent on people will also increase. If the price of the factor of production used to produce a good rises, the minimum price that a supplier is willing to accept for producing each quantity of that good rises. It will also cause income effect, we will feel poorer because of the increase of price of the fuel and our incomes are still remaining the same. The supply of petrol will increase because the government would like to earn more if they increase the price of petrol in our country. There will be an income outflow for this situation. When the outflow occurs, it will affect the economy stability. Government has to figure it out to stabilize the economy so that it will not cause inflation in the country.