Oil Market & U.S. EconomyIn June 2008, when the price of oil had crossed $120 per barrel, the predictions for the impacts on the U.S. economy were dire. Whereas just months previous, prices were expected to top out at $100 before returning to a more reasonable equilibrium point (Schoen, 2007), now the potential of $200 barrel oil came to pass, bringing with it economic catastrophe (Biderman, 2008). The short version is that demand for oil in the United States is relatively price inelastic. Therefore, as the price of oil increases, the amount of money that American businesses and consumers spend on oil increases. This reduces the amount of money available for consumer spending and industrial infrastructure investment. Ultimately, this harms the economy by concentrating capital flows to the petroleum industry. The capital eventually flows out of the country to the petroleum-producing regions.
This paper will delve into the subject in greater detail. First, the patterns of demand will be analyzed. Then the relationship between world oil supply and U.S. consumption will be examined. From there, the impact of high and low oil prices on the U.S. economy will be determined. Lastly, this paper will outline the benefits to the U.S. economy of low oil prices.
US Oil Demand
In 2007, the U.S. consumed 20.7 million barrels of oil per day. Of this, the largest component by far was transportation, at 14.26 million barrels, or 68.9% of all consumption. The other major use was industrial, at 5.06 million barrels per day, or 24.4% of consumption. The remaining markets accounted for 1.37 million barrels per day, or 6.6% of total consumption (Energy Information Administration, 2007).
Price elasticity of demand for oil is low. In the late 70s, price elasticity was estimated to be between -0.21 and -0.34 (Hughes, et al., 2006). This indicates a significant willingness on the part of consumers to reduce oil consumption in the face of rising prices. This is supported by the rise in compact cars over the same period, indicating that the increased oil prices had an impact on car purchase decisions. In another period of similarly high oil prices, 2001-2006, the price elasticity of demand was determined to be between -0.034 and -0.077 (Ibid). This indicates a significant shift in the short-term elasticity of oil demand. Consumers during that period did not curtail their oil usage, even in the face of high prices. There was some indication that the oil price spike in early 2008 did result in declining sales of SUVs and other large vehicles, and an increase in sales of hybrids and compacts, however. The difference is that the oil price level at which consumer behavior began to shift is significantly higher now.
There are many reasons for the shift in short-term elasticity. Of significant importance is the physical structure of our living environment. Americans today driver further distances in their commutes, and our communities have become overwhelmingly car-centric. It is difficult if not impossible, outside of a handful of major cities, to function in the United States without a car. It is worth noting that during 2001-2006, the SUV was the automobile of choice for millions of Americans, the opposite of the late 1970s trend towards smaller cars.
One of the reasons for this difference is that Americans have become so accustomed to high gas prices that those prices, and their increases, no longer play as significant a role in the decision-making process. In the late 70s, American consumers were coming off of the embargo, and experiencing Jimmy Carter's price controls. A decade earlier, gas prices were stable and there was no consideration of a possible shortage. In short, the high prices were still a shock to many; today they are not a shock but just another cost of living.
Relationship between World Supply and U.S. Consumption
The late 1970s situation as just described was a clear example of U.S. consumption decreasing in response to a perceived decline in global supply, as this decline was reflected in higher prices. The more recent price fluctuations, however, are not viewed as being related to global supply. The prevailing chatter is that commodities speculators, fueled by 10% margin requirements and in need of the next bubble, have contributed to the volatility of fuel prices in recent years. Yet now, more than in the 1970s, there are real supply issues. Peak oil is widely believed to have come and gone (Deffeyes, 2003). Emerging nations such as China and India are...
Rational firms will choose the lowest-cost option between the two. The market is expected to be efficient, so that while some firms will find it cheaper to pollute, other firms will find it cheaper to install pollution abatement mechanisms. Ultimately, the system will seek to deliver the lowest per-unit cost of abatement. This will be achieved because the firms that are going to abate their pollution are the ones for
Producer Symbolism) at that time, the oil balance of these countries was not as critical as it is today, and they were not really depending on "foreign" oil. The entire situation changed with the October War which started shortly after midday on Saturday, October 6, 1973 with a concerted attack by Egypt and Syria on Israel. (Oil Price History and Analysis) At the same time, one has to remember three
" (Krapels, 2007) it is additionally related "For the futures-only report, spreading measures the extent to which each non-commercial traders holds equal long and short futures positions. For the options-and-futures-combined report, spreading measures to the extent to which each non-commercial trader holds equal combined-long and combined-short positions." (CFTC, as cited in Krapels, 2007) Krapels states that there are areas where dismissal of causation should not be the projectory in keeping
Oil and Gas Prices: Gas prices have been one of the major issues or problems in the past few years, especially in the United States where more people are hitting the road drive. As the driving season begins in the summer, many Americans continue to look at gasoline price at the pump. In the past few months, many drivers have been wondering why they have to pay more at the pump
283). This led to the National Environmental Policy Act of 1969 (NEPA). This Act acknowledged the fact that there was a lack of knowledge about the ocean ecosystem. This was an important insight and "At its core, NEPA requires federal agencies to produce an environmental impact statement (EIS) whenever they propose a major federal action" but " it was unclear from the original language of the statute whether the
Oil and the Silk Road The global supply of oil is depleting at unprecedented levels despite the efforts of many developed nations to deal effectively with the problem. National dependencies on oil have created ripple effects in the global economy that are manifested primarily by restructured world oil markets and the political aspirations of producer and consumer nations with regard to oil exploration, refinement, transportation, and pricing ("Annual Energy Review," 2012). Just
Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.
Get Started Now