How Oil Price Affect World Economy

1. Americans are known for their long-term love affair with their cars. But as gasoline prices soar and concern about the environment mounts, the standard of living by ordinary people on a daily basis also become difficult; the need to conserve gasoline has become increasingly clear. What would it take to reduce the overall demand for gasoline in the United States most especially as we see it now?

Another cause for the decline in oil prices is caused by an increase in consumers purchasing more fuel efficient vehicles, such as hybrid or electric vehicles. In many countries today, especially in North America, there has been an increased demand for fuel efficient vehicles. This is evident in TV commercials which are advertising more and more vehicles that get 40 to 50 miles per gallon, and by the ever increasing commercials for electric vehicles. Consumers are tired of paying outrageous prices for oil and are demanding more for their money. As this demand continues to grow, the demand for oil will decrease.

The reason of the fall in oil prices are the constant change of demand. The need for the oil is actually stagnant. Crude oil is becoming a product of the past. Today, you can harvest energy from solar, wind, water, heat, and waves. According to The Economist, “The use of fossil fuels in the rich world is mostly falling. Emerging economies are not currently taking up the slack”.

The consumption of the oil cause changes in the supply and demand. The United States produces 11 million barrels of oil every day. We are one of the biggest countries to have a big influence on the production and prices of the oil. The basic supply and demand theory explains that the if a product is produced more, the cheaper it should sell. If a country were to double the output of oil day, prices would fall and the Production is high, but the distribution of oil isn’t keeping up with the market. The United States builds an average of one oil refinery per 10 years. This is a net loss due to the fact construction has slowed down since 1970s. Since 1970s, the United States has 8 less oil refineries today. The reason why we are not oversupplied with cheap oil is because of the other countries’ higher net margin and the only operate at 62% of their capacity. Excess capacity is only there to meet future demand. With demand moving accordingly, oil prices will continue to be set mostly by the market — despite external players’ best efforts. (McFarlane)

When there is a large increase in the price of a product in the short run it results in inelastic demand because there is little time to adjust to the increase and find an alternative product. Let’s say the consumer uses the local bus service to go to work. On the way to work one day he notices that the prices of transportation will double beginning tomorrow. In the short time he may be forced to continue paying the higher prices until he can find alternative transportation. As time passes, the consumer can make alternative choices such as carpooling, working from home, or riding a bike to work; therefore, the cost increase for the transportation would be elastic.

I found current event article by Zumbrun discussing supply or demand of oil in which he attempts to answer collapse of past year oil price whether it was driven by supply or demand. According to Zumbrun (2015), oil demand started out as bad, but turned into the good for supply as concluded by IMF economists based on the World Economic Outlook.

The demand for gasoline sold at a local gasoline station which is of a particular brand is price elastic. At this time, the need and want for a certain brand of gasoline is not like it used to be due to increase in price of the gasoline. People are looking to save money by buying gasoline from the station that has the cheapest price so if the local gas station raises their price, buyers will shop around to fulfill their needs and save some money at the same time.

The short run and long run demand for gasoline is inelastic because the prices of gasoline increases and do not decrease too much due to people are going to buy gasoline whether the cost is high or not because people need it to travel to their destinations. Therefore, substitutes for gasoline and also consumers are buying the gasoline even though the price is high. Inelastic is different from elastic because inelastic demand will not rise or fall depending on the price.

The long-run equilibrium of the economy is found where the aggregate-demand curve crosses the long-run aggregate-supply curve (point A). When the economy reaches this long-run equilibrium, the expected price level will have adjusted to equal the actual price level. As a result, the short-run aggregate-supply curve crosses this point as well.

The demand of gasoline has increased steadily over the last twenty years. In 1981 the U.S. averaged 6.5 million barrels of gasoline consumption per day. By comparison, in 2004 the U.S. averaged 9.2 million barrels of gasoline consumption per day. For most of this time period, gas prices stayed relatively the same. This is because the U.S. refineries increased their production to meet the demand and maintain the equilibrium price. Also during this same time period worldwide demand for crude oil increased 27%. Crude oil producers also increased their production to meet the demand keeping prices the same.

Elasticity : rising or falling price lead changes in quantity of demand, and the quantity of supply and this so-called elasticity

3) The ‘puzzle’ mentioned in the article is 10% increase in gasoline consumption when the gasoline prices surged by 53% from 1998 to 2004. As per Law of demand, the consumption of gasoline should have decreased with the increase in price of gasoline.

In the year 2050, the whole world notice that oil was starting to become scarce. One thing all the countries saw was all the oil refineries were starting to go out of production which lead to high prices. Although

Different factors such as a rise in raw material cost, rise in the wages, and marketing costs can make the MC curve shift upwards from MC0 to MC1. But as long as the MC curve keeps within the interval defined by points A and B, the price, demand and quantity produced will remain unchanged as MC will still be equal to MR. Prices are pretty sticky in the automobile market. If BMW decides to raise its price above P, its competitors will keep their prices unchanged. As a result, some consumers will switch to cheaper substitute goods and demand for BMW will fall proportionately more than the increase in price, so we can conclude that for any price above P, demand is relatively elastic. On the other hand, if BMW decides to lower its price below P, then its competitors will follow and cut their prices too. As a result, even a big decrease in price will only lead to a small increase in demand, so we conclude that for any price below P, demand will be relatively inelastic. Since BMW and its competitors don’t want to lose out on market share, nor on profits, they will all produce at the profit maximising price P.

Since the past few decades, owning a car has become a necessity in order to commute from one place to another. However, cars do not work automatically, they require fuel. Since the past decade, the petroleum industry has become one of the leading industries impacting the nation’s economy. Oil has become an essential commodity as it is utilized in transportation vehicles, serves as a raw material for manufacturing plastics, and is utilized in homes for cooking. America’s economy is greatly dependent on petroleum as it is the “black gold” of the nation. The considerable significance of oil has led to the drilling of it, which is not only limited to land, but also the oceans. Offshore drilling is a method in which petroleum is extracted from underneath the seabed. It is one of the significant technological advancements in the past few decades. However, the ones who are involved in the process of offshore oil production are humans, and humans tend to make mistakes. In 1969, due to a human error, an oil spill occurred and natural gas, oil, and mud shot up the well and oozed into the ocean (“Offshore Drilling”). The oil spilled led to an environmental disaster which killed thousands of marine animals and distorted the environment. In order to prevent the same error, the government passed a moratorium in 1981, banning more than 85 percent of the country’s oil drilling sites (“Offshore Drilling”). The moratorium restricted the United States to mass-produce its natural resource.