Economics Essay Oil Prices

(For more, see: One problem, and this is where theory butts up against practice.Production is high, but distribution and refinement aren’t keeping up with it.Even after the appearance of alternate forms of energy like solar power, water and wind, the importance of crude oil as the main source of energy still cannot be denied.

If someone were to invent a well stimulation technique that could double an oil field’s output for only a small incremental cost, then, with demand staying static, prices should fall. Oil production in North America is at an all-time zenith, with fields in North Dakota and Alberta as fruitful as ever.

Since the internal combustion engine still predominates on our roads, and demand hasn’t kept up with supply, shouldn’t gas be selling for nickels a gallon?

If we assume 12,000 miles per year, and 20 miles per gallon (any sources that claim to offer more accurate estimates are kidding both you and themselves), the oil the United States produces domestically is enough to fuel half the nation’s road vehicles.

(For more, see: Basic supply-and-demand theory states that the more of a product is produced, the more cheaply it should sell, all things being equal. The reason more was produced in the first place is because it became more economically efficient (or no less economically efficient) to do so.

It’s easy to curse and moan when gas seems expensive.

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The oil companies are abusing the helpless customers who are effectively indentured to them, and can name their own prices thanks to a system of collusion and profiteering.

The answer probably won’t surprise you: Saudi Arabia.

But the very close runner-up might: The United States.

Through demand and supply transmission mechanism, oil prices impacts the real economic activity.

The supply side effects are associated with the fact that crude oil is a basic input to production, and an increase in oil price leads to a rise in production costs ultimately that result in firms’ lower output.

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