Raising Gasoline Price and Oil Spill (Essay Sample)

Raising the Price of Its Gasoline to Cover the Costs of a Huge Oil Spill
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Raising Gasoline Price to Cover the Costs of a Huge Oil Spill
Introduction
In the oil industry, most of the basic oil byproducts such as gasoline are a result of refined crude oil. Consequently, the profits earned by oil companies also depend on the amount of crude oil mined and the costs incurred during extraction and refinery of the oil. In this case, oil companies have to ensure that they incur minimum cost in order to earn maximum profits. In the recent years most oil companies have suffered huge losses due to costs incurred as a result of oil spills. In this case, the best options to counter the costs would be prevention of further oil mining or increase in the price of the available oil stocks. One of the byproducts of crude oil that is widely used and could earn huge profits for an oil company is gasoline. However, increasing the price of gasoline would also have negative implications on the company. Hence a company should not increase the price of gasoline after experiencing an oil spill since the company may end up jeopardizing its position in the market.
Background
During the 2010 BP oil spill in the Gulf of Mexico it was estimated that 210000 gallons of oil were spilling daily. This translated to a daily loss of 430,000 dollars for the company while excluding losses that would be incurred in cleaning up the oil spill. Out of the 210000 gallons of oil lost daily 115000 gallons consisted of gasoline. In this case, the losses incurred were huge which lead to an increase in the price of oil by $3 per barrel (Wesley, 2012). However based on the high costs incurred daily due to the spill, halting the oil extraction process and sealing the leakage would have prevented more losses regardless of whether the price of oil was increased immediately. In this case, with regards to Exxon Mobil the oil company is also likely to face a similar situation in the event of an oil spill.
Concept Pros
Since the oil market is influenced by suppliers a company would risk being disadvantaged if it raised its oil price independently. For instance, the Organization of the Petroleum Exporting Countries which is the most significant oil trade organization requires a minimum of price 100 dollars per oil barrel (Konrad, 2012). In this case, since oil trade organizations can set the minimum price sale for a barrel of oil they can also restrict unwarranted increase of oil prices. In this case, it would not be advisable for Exxon Mobil to increase its oil prices. Despite the fact that elasticity of demand for oil is low the supply of oil can be highly influenced by oil trade organizations. Consequently, if Exxon Mobil raises the price of gasoline other oil refiners may maintain the same prices for their products which would increase their supply. Hence Exxon Mobil would be in a difficult position to break into the supply chain. This is due to the fact that individuals supplying the Exxon Mobil gasoline would be prompted to incur high costs of supplying unlike suppliers of rival refiners. As a result, Exxon Mobil would end up losing out on the profits since suppliers of Exxon Mobil products may end up demanding compensation for high cost of supplying.
Similarly, the supply of oil and its price are also influenced by the politics. This is due to the fact that the sale and purchase of oil within a country has a huge influence on the international trade of the country (Konrad, 2012). In this case, if an oil company such as Exxon Mobil may raise its gasoline prices due to an oil spill, the company may end up facing a lot of political resistance. Based on the degrading environmental effects of oil spills, the company may risk being branded to be profit oriented as opposed to conserving the environment. As a result increase in prices may end up not being effective.
Consequently, the low price elasticity of demand for gasoline is based on the fact that consumers demand more gasoline than the gasoline produced. However, this is due to the fact that oil production is regulated by oil trade organizations in order to avoid overproduction of gasoline and other crude oil by products (Konrad, 2012). In this case, an increase in the price of gasoline by Exxon Mobil may coincide with an increase in production levels set by the oil trade organizations. In this case, the competing oil refiners may be given the mandate to mine more crude oil which would result to an increase in the production of oil. This may lead to an increase in the supply of oil and hence the high demand for oil would be catered for. Consequently, if the consumers realize that there is adequate gasoline in the market the consumers would end up searching for the best price deals. As a result, consumers would end up avoiding the gasoline sold by Exxon Mobil since it would be more expensive.
Opposing Points of View
On the other hand, in order to recover the loss that arises as a result of oil spills a company should be in a position to recover the costs incurred. In this case, most oil companies should exploit the fact that the current oil market is influenced more by d...