Oil/Petroleum industry's price elasticity of supply and demand

Solution Preview

*Research the Oil/Petroleum industry's price elasticity of supply and demand.
- Is price elasticity of demand considered elastic or inelastic?

Elasticity is the proportional change in one variable relative to the proportion change in another variable. The concept of elasticity can be used whenever there is a cause and effect relationship. The causal variable is often called the independent variable, while the affected variable is called the dependent variable.

In economics, the price elasticity of demand (PED) is an elasticity that measures the responsiveness of the quantity demanded of a good to its price. The elasticity of the portion of the demand curve facing a firm determines how its revenue will change in response to changes in price. Elasticities of demand with an absolute value greater than 1.0 are "elastic", and a decrease in price will be outweighed by the greater quantity of goods sold, causing revenue to increase. Elasticities of demand with an absolute value less than 1.0 are "inelastic", and the decrease in price will be not be made up for by the greater quantity of goods sold, causing revenue to decrease.

The price elasticity of oil is inelastic as it has no close substitute and its demand will be fairly high even with the increase in prices. For example the Currently demand of oil has increased though the prices has touched $75 per barrel.

http://www.bized.co.uk/current/mind/2003_4/061003.htm as retrieved on 27 Jun 2007 01:07:26 GMT.

- Are there substitutes available?
There are no close substitutes, though there are substitutes like walking, cycling bio fuel or alternate energy fuel.

- Is the good a luxury or a necessity

This is a necessity good but having low substitutes.

- What is the price elasticity of supply
The price elasticity of supply is fairly inelastic as there is a cartel known as OPEC which is controlling the supply and price of the Oil globally.

Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

The economic purpose of the Organization, according to its Statute, is :
? Coordination and unification of the petroleum policies and prices of its member countries
? Determination of the best means for safeguarding their interests, individually and collectively;
? devising ways and means of ensuring the stabilization of prices in international oil ...