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What is Driving Oil Prices

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

1. How do changes in supply and demand effect oil prices?
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. Households increase demand for hybrid and electric vehicles.
b. Crude oil reserves are discovered in Venezuela.
For each event, you must specify how it affects 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.
e.g. The increasing use of plastics to produce a wide range of products.
Assume that petroleum products are used as a factor of production. This will increase the demand of oil and shift the demand curve to the right. This will cause the price and quantity of oil to increase.
4. If you consider a product like gasoline, would you favor price control so that you pay less than the current price at the pump? Why or why not?

Energy Information Administration. 25th Anniversary of the 1973 Oil Embargo. Retrieved September 1, 2011.

Solution Preview

I will answer each question so that you understand each and then you can organize the comments into a paper that flows (introduction, body, conclusion) and shows your understanding of the concepts of supply and demand.

1. How do changes in supply and demand effect oil prices?

A change in quantity supplied, presuming steady demand, will result in prices going up or down. If more quantity is supplied, the prices go down. If lower quantities are supplied, then the prices go up. So, when the disruptions in the oil supplied by Iraq because of the war sabotaging oil wells reduces the oil available for the world market, the prices go up.

A change in quantity demanded, presuming a steady supply, will result in prices going up or down. If the oil supplied is steady, but China is becoming more developed and therefore needs more oil, it will big up the prices of the existing supply. If the green energy and sustainability movement in the US reduces the demand for oil, the prices for the existing supply will go down.

2. Which two ...

Solution Summary

Your tutorial is 621 words plus two references. It argues against price controls and explains why. It examines the impact on demand, quantity demanded, supply and quantity supplied for the two events given.

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