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    Oil Prices: A Market Analysis

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    Module 2 - Case
    Price Dynamics

    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. A slowdown in the production of crude oil worldwide.

    c. Congressional action that allows oil-drilling operations in more areas of the Alaska preserve.

    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.

    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, $1.00 less for example. Why or why not? (Be sure to do some of your own research to support your answer. It might be useful to review what happened during the 1973 oil crisis). You can review the optional resource:

    Energy Information Administration. 25th Anniversary of the 1973 Oil Embargo. Retrieved February 17, 2011 from: click here

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    Solution Preview

    Oil Prices: Demand and Supply

    1. What are three factors that might explain why oil prices are high?
    Based on the article, the three factors contributor of the high oil prices are demand, supply, and speculation.

    The rapid increase in the demand for oil results to an elevated oil price. Increase in the number of population brings about an increase in the number of vehicles. The greater number of vehicles demand means more demand for oil.

    The world suffered a dwindling in the supply of oil in the world market. This is due to the gulf war that happened in the past twenty years. The war interrupted the production of oil causing a massive reduction in the supply of oil in the world ...

    Solution Summary

    This solution is a discussion of the reading entitled "What is Driving Oil Prices". Discussions on price and quantity of oil in various situations using graphs were also done.