How Oil Price Affect World Economy

1292 Words May 11th, 2005 6 Pages
1. Introduction
The price of oil becomes the bone of contention recently. Oil price seems to be hitting new highs with the regularity of a metronome. It is a bad news for customers who have to pay more on it. More frightening still, this situation may get worse before it come back to normal. No one can exactly predict when the pendulum will soon swing back again since all uncertain factors existing. From the supply side of view, the OPEC is the main producer, being prepared to add or subtract production to balance demand. Moreover, Russia is another major producer of oil in the world. They usually produce more when demand more and subtract when demand reduce to control the price of oil. Anyway, speculator is another factor we have to
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Governments have also begun taxing fuel more heavily to reduce the consumption on petroleum. See Figure 2.4, when the demand for the oil reduce, the consumers will cut back sharply in the quantity demand from Q2 to Q2. The consumer¡¦s expectation about the oil price is decreased, thus the demand for the oil will be reduced, and it shifts the demand curve to left. The price of the oil will be reduced also.
2.2.3. Elasticity of Demand and supply
In the short run, both the supply and demand for oil are relatively inelastic. Supply is inelastic because the quantity of known oil reserves and the capacity for oil extraction can not be changed quickly. Demand is inelastic because buying habits do no respond immediately to changes in price. For example, the drivers with old car which spend lots on petrol may just pay higher price. As the figure 2.5 shows, the short-run supply and demand curves are steep. When the supply of oil shifts from S1 to S2, the price increase from P1 to P2 is large. Over long run, consumers will respond with greater conservation, for instance by replacing old inefficient cars with newer efficient one or electronic one. Thus, as figure 2.6 shows, the long-run supply and demand curves are more elastic. In the long run, the shift in supply curve from S1 to S2, the price increase a bit from P1 to P2. 2.2.4.
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