Question 1 The price of crude oil increased to its highest level due to conditions which impacted supply. Historically, crude oil has traded at between 70 and 150 USD per barrel. But the price increased to over 200 USD in March 2022. Growing demand in Canada for crude to be turned into refined petroleum, coupled with a sharp fall in production in Saudi Arabia have both been factors in the price increase. Bauxite production in Saudi Arabia for 2017-18 fell 65% year-on-year due to an agreement with OPEC. The Energy Information Administration predicts that global consumption of crude oil is likely to be greater than production by 20 million barrels this year. In the US, companies in the steel and alumina industry have put pressure on the US government to relax import controls, warning that otherwise they might run out of petrol. Commentators predict that most steel and alumina producers will be unaffected because crude is such a small part of their spending. a. Explain, using supply and demand analysis, why the price of crude oil has been increasing recently. b. Do you think a) the supply and b) the demand for crude oil is price elastic or inelastic? Justify your choices and explain whether this means any given change in supply or demand will have a bigger effect on the equilibrium price of quantity. c. Illustrate the predictions of the Energy Information Administration and explain how this will be corrected. d. How might companies in the steel and alumina industry react to an increase in the price of crude oil?
Question 1 The price of crude oil increased to its highest level due to conditions which impacted supply. Historically, crude oil has traded at between 70 and 150 USD per barrel. But the price increased to over 200 USD in March 2022. Growing demand in Canada for crude to be turned into refined petroleum, coupled with a sharp fall in production in Saudi Arabia have both been factors in the price increase. Bauxite production in Saudi Arabia for 2017-18 fell 65% year-on-year due to an agreement with OPEC. The Energy Information Administration predicts that global consumption of crude oil is likely to be greater than production by 20 million barrels this year. In the US, companies in the steel and alumina industry have put pressure on the US government to relax import controls, warning that otherwise they might run out of petrol. Commentators predict that most steel and alumina producers will be unaffected because crude is such a small part of their spending. a. Explain, using supply and demand analysis, why the price of crude oil has been increasing recently. b. Do you think a) the supply and b) the demand for crude oil is price elastic or inelastic? Justify your choices and explain whether this means any given change in supply or demand will have a bigger effect on the equilibrium price of quantity. c. Illustrate the predictions of the Energy Information Administration and explain how this will be corrected. d. How might companies in the steel and alumina industry react to an increase in the price of crude oil?
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter5: Elastic And Its Application
Section: Chapter Questions
Problem 11PA: You are the curator of a museum. The museum is running short of funds, so you decide to increase...
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Transcribed Image Text:Question 1
The price of crude oil increased to its highest level due to conditions which impacted supply.
Historically, crude oil has traded at between 70 and 150 USD per barrel. But the price increased
to over 200 USD in March 2022. Growing demand in Canada for crude to be turned into refined
petroleum, coupled with a sharp fall in production in Saudi Arabia have both been factors in the
price increase. Bauxite production in Saudi Arabia for 2017-18 fell 65% year-on-year due to an
agreement with OPEC. The Energy Information Administration predicts that global consumption
of crude oil is likely to be greater than production by 20 million barrels this year.
In the US, companies in the steel and alumina industry have put pressure on the US government
to relax import controls, warning that otherwise they might run out of petrol. Commentators predict
that most steel and alumina producers will be unaffected because crude is such a small part of
their spending.
a. Explain, using supply and demand analysis, why the price of crude oil has been
increasing recently.
b. Do you think a) the supply and b) the demand for crude oil is price elastic or inelastic?
Justify your choices and explain whether this means any given change in supply or
demand will have a bigger effect on the equilibrium price of quantity.
c. Illustrate the predictions of the Energy Information Administration and explain how this
will be corrected.
d. How might companies in the steel and alumina industry react to an increase in the price of
crude oil?
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