It has just been announced that large deposits of oil have been discovered in Ch

Question

It has just been announced that large deposits of oil have been discovered in Chile. It will take five years for production to begin, but after that time Chile will become the world's largest oil producer by a large margin.

a. How and why does this announcement affect the world supply curve for oil in the period before Chile's production comes online?

b. How and why does this announcement affect the world demand curve for oil in the period before Chile's production comes online?

c. Based on your answers to parts a and b, what can you say about what will happen to the world price and quantity of oil consumed in the period before Chile's production comes online?

Explanation / Answer

Before the production, producers are expecting more supply in future and chile will capture the market. So they will start selling their stock and world supply will increase. However, it depends on trade relations.

From the demand side, now it is anticipated that there will be more supply of oil in the market. So demand will be higher.

Therefore both supply and demand will increase before its production. This will lower price of oil and increase quantity.

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