ABDUL RAHEEMMOHAMMED

Business Economics
(ECON545)
Project 2 Situation C
Professor: Mr. ALAN ANDERSON

Situation C
Cousin Edgar is always thinking of the next business idea. This time, he
plans to invest in buying four gas stations. He reckons American consumers
have come to accept the high gasoline prices, and estimates world prices for
gasoline to increase even further with high demand from India and China.
Besides, Cousin Edgar thinks he will make a good profit on the sale of
convenience items at each station. But before buying the gas stations, he
decides to ask for your advice because you are taking this course in business
economics.

You happened to read the piece Bank Lending Signals a Strengthening

Economy on page 856 of the textbook. Cousin Edgar needs financing for
his new business, but you realize there are more macroeconomic factors he
needs to consider in timing his decision. You decide to research the economy
in terms of GDP growth rate, interest rates, level of unemployment, the
business cycle, fiscal policy, monetary policy, international trade, and
demographics. You want to provide Cousin Edgar with the most informed
advice possible.

Summary:
Edgar wants to invest in gasoline by opening Gas Stations in four different
locations. These locations will also include convenience items which he
thinks might make him extra profit.

Edgars analogy for the gas stations to be profitable is based on the notion
that the mass consumer population of the United States has accepted the
high price of gas after the recession of 2008. The people got used to paying
high price. He also expects that highly developing countries like India and
China will also rise their demands for oil and thus will increase the prices.
One thing to note is that US is the largest consumer of Crude Oil and the
second largest consumer is China.

But the reasoning is inadequate to come to a conclusion. Thus we need to

evaluate the situation by taking into account macroeconomic indicators of
countries like GDP, business cycle, international trade, consumption of oil in
the US, inflation, unemployment and policies.

Gasoline & GDP of United States (Growth Rate)

In the U.S., when the price of gasoline increases by a certain percentage, the
quantity demanded will decrease by a smaller percentage. Basically, as
gasoline prices increase, consumers are not only cutting back on driving but
it affects consumers pockets that they will have less money to spend on
other products. A survey of planned consumer spending indicates that nearly
75 percent of American consumers may reduce spending on other products if
gas prices continue to rise. Because of this change, consumers lifestyle will
be affected that including people moving closer to work, and using public
transportation more commonly.

The strength of domestic demand will more than offset the headwinds from
abroad, including a slower pace of export growth as a result of the
strengthening U.S. dollar said Sam Bullard, a senior economist at Wells
Fargo.
Cheap oil will lift GDP growth rate in the U.S. According to researches, if
gasoline prices stay near $2 a gallon for 2015, the economy will see a net
savings of $750 per household, or just over $90 billion in savings across 124
million U.S. households. Growth rate in the U.S. has increased by 5% and
2.3% in the third and fourth quarter of 2014. Lower gasoline prices are
expected to add at least half a percentage point to GDP growth.

The greatest monetary lift will originate from the delayed drop in oil costs
that started in June 2014. Gas costs have dove 43 percent since June 2014, as
per U.S. government information; leaving Americans with more cash for
optional spending stimulate the economy in the U.S.

Gasoline & International Trade (Business Cycle)

The United States has become a net importer of oil and Saudi Arabia is the
largest supplier of oil to the West. On the international scene, Saudi Arabia,
which can produce oil for less than $10 a barrel, has indicated a willingness
to maintain higher production levels, thus helping keep prices from rising
much above $70 per barrel. The Saudi oil minister told the press after an
OPEC meeting that his country was perfectly willing to let oil prices keep
falling and wait for the world oil market to stabilize itself eventually. As
The Economist noted, the Saudis are happy to once again cooperate with
America because lower crude prices help squeeze three international bad
actors who are almost wholly dependent on petrol revenue: Russian
President Vladimir Putin, the Ayatollahs in Iran and the dictators of
Venezuela. So, lower oil prices help ordinary the U.S. to reduce the trade
deficit with Asia. China is worlds second largest consumer of oil, and
countries such as India and Brazil are seeing a market increase in oil
demand.
Lower oil prices would also directly reduce the huge U.S. trade deficit and
the economy activity stimulated would also reduce the budget deficit
because of higher tax revenues and reduced demand for public services.

The article presents that due to increase in the lending from the banks, the
economy is showing a positive sign in its growth.
The effects of gasoline prices on the U.S. business cycles are investigated. In
order to differentiate between gasoline supply and demand shocks, the price
of gasoline is endogenously determined through a transportation sector that
uses gasoline as an input of production.

Gasoline prices have a close relationship with the business cycles because:
Transportation of goods between producers and consumers is
achieved by using gasoline.
Gasoline is the most important form of the main energy input in the
United States that accounts for 48.7 percent of all energy used by
consumers.
Gasoline prices reflect the developments in the global energy markets.
Gasoline & Inflation

Inflation usually follows the same direction as oil prices move. At the point
when oil costs climb, inflation goes up; when oil costs move down, inflation
goes down on the grounds that oil is utilized as crude material for some
businesses so it is a significant factor in the economy. For example, the
manufacturers of tires and paints use oil as an input for their company. If the
oil price soars then it will raise the price of products. Thus inflation
increases. Inflation pressures reduced in the fourth quarter of 2014, with the
personal consumption expenditures price index falling at a 0.5 percent rate,
the weakest record since the first quarter of 2009. Excluding food and
energy, prices rose at a 1.1 percent pace that the slowest since the second
quarter of 2013. Oil prices and inflation are connected each other in a cause
and effect relationship.

Gasoline & Unemployment

Oil prices could directly affect unemployment rates in the U.S. For example,
unemployment rates in Oklahoma have decreased to 4.4 percent according to
the U.S. Labor Department. If the prices stay low for the next two years, the
world will likely witness an economic boom that millions of new jobs may
be created and reduces the prices of numerous consumer goods due to lower
production and shipping costs.

Gasoline & Monetary Policy, Fiscal Policy, Interest Rates

Positive improvement for both the U.S. and the worldwide economy is the
sharp decrease in vitality costs. As we all know, the U.S. still is a net shipper
of vitality so falling vitality costs are more valuable for the U.S. economy.
This will likewise prompt a critical ascent in genuine pay development for
families that will have the capacity to be a solid spine to purchaser spending.
The U.S. central bank has kept its short-term interest rate near zero since
December 2008. The Federal Reserve has kept the interest rate at 0.25
percent at December 2014. Lower interest rates allow families get credit
more cheaply to begin a business or expand it. In short, lower interest rates
allow businesses to borrow for less, giving them the capital to hire new
workers to meet rising demand.

In general, interest rates and currencies are directly proportion but even
though interest rate is still low, the value of U.S. dollar has been increasing.
When the U.S. dollar is strong, this helps American oil companies to buy
more oil with every U.S. dollar spent, which drives up demand of oil,
ultimately passing the savings on to consumers.
In short, lower interest rates provide households to get credit cheaply and
thus it raise consumers purchasing power.

Fiscal policy influences the real economy through changes of its variables.
Fiscal policy shocks are important for policy makers, because of their crucial
effects on macroeconomic variables.
Having low interest rate and stronger U.S. dollar provide enterpriser some
opportunities to begin or expand a business, ultimately lower market
conditions have improved further, with strong job gains and a lower
unemployment rate. Declines in energy prices allow household-spending rise
moderately. It gives consumers more money to spend, increasing demand.
Unemployment rate has decreased by 5.6 percent in the fourth quarter of
2014. Now that 2014 has recorded as the best year of employment growth in
15 years. The official figures show that the U.S. had 6,371,000 more people
employed in December.

Conclusion & Suggestion

From a financial point of view, gas does matter at most gas stations only
if they make good amount of money after credit card fees. This is an
important consideration for US consumers as most of its sales are credit.
This might not be very pertinent to countries like China and India. If you
enjoy a location that lets you charge an above market price for your fuel
-- like being right across the street from airport car returns -- gasoline
sales are only marginally profitable after credit card fees. As such, most
stations make their money on the sales in their convenience stores or
through add-ons of additional services, such as car washes.
Moreover, U.S. dollar is strong enough for importers. This helps them to
buy and import more oil with every U.S. dollar spent. Also, all factors
involved are positive signals like market confidence, low inflation, and
strong currency available for international trade. I believe that this
investment would be very profitable for Edgar.

References:
Economics Fourth Edition by Hubbard and OBrian
http://devry.vitalsource.com/#/books/9781269588645/pages/97448179
http://www.cfr.org/world/gasoline-prices/p10596
http://www.cnbc.com/id/102383683
http://www.dailyfinance.com/2014/12/12/gas-stations-owners-like-low-gasprices/
http://economics.fiu.edu/research/working-papers/2014/1409/1409.pdf
http://politicalcalculations.blogspot.com/2012/03/gasoline-prices-andunemployment-rate.html#.VS62JPnF8S4
http://www.businessinsider.com/gas-prices-the-unemployment-rate-anddesperation-2011-9