I am wondering whether and how I can use the model of demand and supply to understand what has been driving the price of gasoline in the US in the last several months and to discuss the policy response of the Biden administration

Listen to the episode of NPR Planet Money (September 2, 2022) "Breaking Down the Price of Gasoline" or read the transcript.

https://www.npr.org/2022/08/31/1120422634/breaking-down-the-price-of-gasoline

https://www.npr.org/transcripts/1120422634

Read the U.S. Department of the Treasury Press Release (July 26, 2022) "The Price Impact of the Strategic Petroleum Reserve Release"

https://home.treasury.gov/news/press-releases/jy0887

Read the White House April 21, 2022 Statements and Releases "Fact Sheet: Biden administration responds to Putin's Price Hike..."

https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/21/fact-sheet-biden-administration-responds-to-putins-price-hike-by-awarding-first-barrels-from-historic-strategic-petroleum-reserve-release-deploying-affordable-clean-energy/

Hint: For this exercise, feel free to stop just before the section titled: "Achieving Real Energy Independence and Lowering Costs for Families"

(a) At the beginning of the episode of the podcast the hosts claim that

"States, Congress, the President - they are all looking into who is to blame for high gas prices, whether anybody at any point in the process has the power to keep them high on purpose. Like it is oil companies? Do they have the power? Is it refineries? Is it gas station owners?"

Please answer this question: By the end of the show, did they find "what is to blame for high gasoline prices?" That is, did they find somebody with the power of keeping the prices high? Explain.

(b) Consider the world market for crude oil. Discuss whether it can be considered perfectly competitive and whether you could analyze it the model of demand and supply. In particular, discuss whether it satisfies the following assumptions

Is the good homogeneous? Does the market satisfy the "law of one price"? Are the buyers and the sellers in the market price takers? Or they have the power to affect the

price that is prevailing in the market?

(c) Given the answers that you gave to the previous point questions, do you think that we can use the model of demand and supply to understand what has been happening in the market for crude oil in the last several months? Explain

(d) By listening to the show, you learn that the price of one barrel of crude oil before the pandemics was going for about $60 and now, it's going for about $100. In fact you also learn that at some point during the pandemic the price of crude oil went down all the way to zero and that recently it climbed up all the way to $130 (before decreasing to about $100 now).

Please try to use the model of demand and supply to explain all these changes in price. In particular,

i. First explain what happened in the real world that could be considered as exogenous shocks in the model of demand and supply of crude oil.

ii. Then translate those exogenous shocks to shifts of the demand and (or) supply curves. iii. Finally Use multiple graphs to illustrate the different equilibrium prices p1 = 60, p2 = 0,

p3 = 130 and p4 = 100 Note: Please in your answer, do not consider at all the response of the Biden administration. I will tell you when I want you to consider it.

(e) How your answers and graphs to the previous point would change if you wanted to distinguish between short run and long run supply curves. In particular are there any shifts of the short-run supply curve that can be considered movement along the long-run supply curve. Explain Note The above question is optional. Answer this question only if you remember, from your previous studies of economics, the concept of short-run and long-run as they apply to the model

of demand and supply.

(f) Now consider the market for gasoline in the the US market. Discuss whether it can be considered perfectly competitive and whether you could analyze it the model of demand and supply. In particular, discuss whether it satisfies the following assumptions

Is the good homogeneous? Does the market satisfy the "law of one price"? Are the buyers and the sellers in the market price takers? Or they have the power to affect the

price that is prevailing in the market?

(g) Given the answers that you gave to the previous point questions, do you think that we can use the model of demand and supply to understand what has been happening in the market for gasoline in the US in the last several months? Explain

(h) What do you think is the relation between the market for US gasoline and the global market for crude oil?

i. First discuss this relation using common sense. ii. Next discuss this relation using the concepts of demand functions and supply functions.

(i) Now Let's move to the policy response analyzed in the U.S. Department of the Treasury Press Release (July 26, 2022). If you were asked to check the estimated impacts of the SPR releases on gasoline prices that the authors provide, what would you do? Note: You are only asked to replicate the first column of the table (the one with title "demand elasticities")

(j) The authors of the U.S. Department of the Treasury Press Release state

As shown in the table above, our analysis suggests that President Biden's historic SPR release, in coordination with IEA partners, lowered the price of gasoline by 17 cents to 42 cents per gallon

Assume that with your calculations, you want to obtain an even higher effect on the price of gasoline. Which assumption should you make?