Oil Prices: Demand and Supply Case Readings: Anderson, R and J. Buol (2005). \"W

Question

Oil Prices: Demand and Supply

Case Readings:

Anderson, R and J. Buol (2005). "What is Driving Oil Prices." The Regional Economist. The Federal Reserve Bank of St. Louis. Retrieved on February 17, 2011 from: http://www.stlouisfed.org/publications/re/2005/a/pages/oil_prices.cfm

Using the case assignment readings, answer the following questions in 4-5 page essay.

1. What are three factors that might explain why oil prices are high?

2. Which two countries are the largest consumers of petroleum products?

3. Explain what happens to price and quantity of oil when the following events occur:

a. The rising popularity of hybrid vehicles.

b. Political conflict in the Middle East.

For each event, you must specify how it effects either demand, quantity demanded, supply, or quantity demanded. It is also important to demonstrate how the change will affect the market demand or supply curve. Also, be sure to state any assumption you are making regarding the relationship of the event and oil.

Explanation / Answer

1. What are three factors that might explain why oil prices are high? Ans. :The price of gas is a touchy subject these days and everyone has their own theories about it. There is one perspective we aren’t hearing very much about: World supply and demand is a factor in gas prices, but the U.S. consumption of fuel (which is roughly 25% of world consumption or more) has dropped by millions of gallons since last year and yet prices continued to rise significantly. Some people are trying to lay the blame directly on environmentalists or “big oil” for high gas prices. While these are possible factors (especially the latter) other key factors in high gas prices are the weak dollar/inflation (aka the Federal Reserve), the current wars we are in, and the likelihood of the U.S. starting more wars in the near future. The wars cost our country over 400 million dollars a day. To cover the massive war spending costs money is printed out of thin air by the Fed. This increases the money supply and devalues the dollar, causing inflation. Next time you are filling up your tank remember you are also paying the War Inflation Tax. One other point: I’ve heard various news outlets (actually Fox is the one I know of for sure) say things like “high gas and food prices are causing inflation”. Silly Fox, inflation is when an increased volume of money results in the loss of the value of that money. Inflation causes high gas and food prices, not the other way around — get it right! Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. This concept is based on the observed production rates of individual oil wells, and the combined production rate of a field of related oil wells. The aggregate production rate from an oil field over time usually grows exponentially until the rate peaks and then declines—sometimes rapidly—until the field is depleted. This concept is derived from the Hubbert curve, and has been shown to be applicable to the sum of a nation’s domestic production rate, and is similarly applied to the global rate of petroleum production. Peak oil is often confused with oil depletion; peak oil is the point of maximum production while depletion refers to a period of falling reserves and supply. M. King Hubbert created and first used the models behind peak oil in 1956 to accurately predict that United States oil production would peak between 1965 and 1970.[1] His logistic model, now called Hubbert peak theory, and its variants have described with reasonable accuracy the peak and decline of production from oil wells, fields, regions, and countries,[2] and has also proved useful in other limited-resource production-domains. According to the Hubbert model, the production rate of a limited resource will follow a roughly symmetrical logistic distribution curve (sometimes incorrectly compared to a bell-shaped curve) based on the limits of exploitability and market pressures. Some observers, such as petroleum industry experts Kenneth S. Deffeyes and Matthew Simmons, believe the high dependence of most modern industrial transport, agricultural, and industrial systems on the relative low cost and high availability of oil will cause the post-peak production decline and possible severe increases in the price of oil to have negative implications for the global economy. Predictions vary greatly as to what exactly these negative effects would be. If political and economic changes only occur in reaction to high prices and shortages rather than in reaction to the threat of a peak, then the degree of economic damage to importing countries will largely depend on how rapidly oil imports decline post-peak. Optimistic estimations of peak production forecast the global decline will begin by 2020 or later, and assume major investments in alternatives will occur before a crisis, without requiring major changes in the lifestyle of heavily oil-consuming nations. These models show the price of oil at first escalating and then retreating as other types of fuel and energy sources are used.[3] Pessimistic predictions of future oil production operate on the thesis that either the peak has already occurred,[4][5][6][7] that oil production is on the cusp of the peak, or that it will occur shortly. 2. Which two countries are the largest consumers of petroleum products? Ans.: 1 United States of America 18,690,000 (bbl/day) 2009 est. - European Union 13,680,000 (bbl/day) 2007 est. 2 China 8,200,000(bbl/day) 2009 est. 3 Japan 4,363,000 (bbl/day) 2009 est. Ans.3 oil prices will go high in the events that is said to took place.

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