Introduction
In a market-oriented economy, a change in the price of a product is usually caused by changes in the factors that affect the demand and/or the supply of the product and the price elasticity of the demand for and the supply of the product.
Consider the market for crude oil. As you know, changes in the price of crude oil affect just about everything that is made, transported, eaten, and sold in the United States. For example, a change in the price of crude oil is likely to affect the prices of products like jet fuel, gasoline, diesel, and home heating oil, just to name a few. There is a strong correlation between the price of crude oil and the price of gasoline. The Organization of Petroleum Exporting Countries (OPEC) is the largest group of crude oil-producing countries in the world.
According to Statistica (2022), the annual average OPEC oil price is currently $89.82 per barrel. This is up from $69.72 in 2021 and comes in the wake of three key events. The first event was the imposition of sanctions against the exportation of Iranian oil. The second event was the significant reduction in oil production in the aftermath of the outbreak of COVID-19 during which oil consumption fell to an all-time low. Lastly, and most recently is the imposition of sanctions on Russia following the illegal invasion of Ukraine?
Initial Post Instructions
For the initial post, address the following:
Considering the demand and supply sides of the crude oil market, provide a comprehensive analysis of domestic and international factors that may be driving the increases in the price of crude oil since 2019.
If the price of crude oil continues to increase, how will the increases affect the average consumer’s buying behavior in the short-term and the long-term, considering that the demand for most of the products derived from crude oil is typically inelastic?
Explain how changes in the price of gasoline affect the average consumer’s buying behavior of related goods like cars, the use of public transportation, vacations, etc.
Suppose consumers have become very informed and convinced about the harmful effects of carbon emissions on both the environment and public health. Will this newly acquired information change the consumer’s demand for gasoline or the quantity of gasoline demanded? Explain.
Will the increase in the production of affordable electric cars change the consumer’s demand or quantity demanded of gasoline? Explain.
Week 2 Discussion: Demand and Supply
Considering the demand and supply sides of the crude oil market, provide a comprehensive analysis of domestic and international factors that may be driving the increases in the price of crude oil since 2019.
The demand and supply sides of the crude oil market have always been reciprocating to price change and behind this change in price are the domestic and international factors that are highly held accountable as they play a significant role in it. There are three major factors in the international market of crude oil which influence the prices, and those are demand, supply, and geopolitics (Urbi, 2018). Among the domestic factors, the high rate of COVID-19 vaccination, the unfastening of the restriction related to the prevention of the Pandemic, and the economic growth as a whole resulted in increased demand in the domestic market of the United States just like other countries and increased the global demand for crude oil as well. This increase in demand was not met by a sufficient supply of crude oil in the market, and this led to an increase in the price of crude oil (Troderman, 2022). Among the international factor, the economic growth of other nations, the development of developing countries, the increased demand for crude oil during the pandemic situation since 2019, and the slower increase in crude oil production by the Organization of the Petroleum Exporting Countries (OPEC) along with the coordination of Russia resulted in the increase in the price of the crude oil since 2019 (Troderman, 2022).
If the price of crude oil continues to increase, how will the increases affect the average consumer’s buying behavior in the short-term and the long-term, considering that the demand for most of the products derived from crude oil is typically inelastic?
The situation when an increase in the price of commodity results in almost no effect on the demand for that commodity, that the sensitivity of the change in quantity demanded is very less concerning the change in the price of the commodity, the demand for the commodity is said to be inelastic. For an inelastic good, due to the unavailability or less availability of the alternative goods, the demand remains inelastic in the short run, but in the long run, the awareness regarding the alternatives is available to the consumers and hence the responsiveness to a change in price increases in the long run (Greenlaw & Shapiro, 2017). Similarly, in the short run, for an increase in the price of an inelastic good like crude oil, the buying behavior of the consumers will not change much, that is, will not get much affected. Whereas, in the long run eventually due to the availability of alternatives to crude oil, the buying behavior of the consumers will change which will result in a change in the quantity demanded of crude oil in the long run.
Explain how changes in the price of gasoline affect the average consumer’s buying behavior of related goods like cars, the use of public transportation, vacations, etc.
The effect of the change in the price of gasoline on the average buying behavior of consumers on related goods like cars, the use of public transport, vacations, etc. is to be understood from the concept of the cross-price elasticity of demand. The car-buying behavior of consumers is sensitive to any change in the price of gasoline and hence, in a situation of the increasing price of gasoline, the consumers are likely to choose to delay or postpone the decision regarding purchasing automobiles or cars (All Answers Ltd., 2018). On the other hand, much evidence has shown the sensitivity of the use of public transportation concerning the change in the price of gasoline. For example, the usage of public transportation by people is likely to increase if the price of gasoline increases (Chi, 2022).
Suppose consumers have become very informed and convinced about the harmful effects of carbon emissions on both the environment and public health. Will this newly acquired information change the consumer’s demand for gasoline or the quantity of gasoline demanded? Explain.
The explanation of the situation of an effect on the gasoline demand, when the consumers have become very informed and convinced about the harmful effects of carbon emissions on both the environment and public health, can be explained with the concept of change in demand. The demand for a commodity when changes due to the change in other factors which are not the own price of that commodity, for example, change in the taste and preferences of the consumers, change in the income of the consumers, change in the price of related goods (substitute goods or complementary goods), etc., is regarded as a change in demand and this case the demand curve shifts rightward or leftward depending on the magnitude of change (Greenlaw & Shapiro, 2017). Hence, in a situation where the consumers have acquired piece of new information regarding the harmful effects of carbon emissions on both the environment and public health, there will be a fall in the demand for Gasoline and hence the decrease in demand will cause the demand curve for gasoline to shift leftward.
Will the increase in the production of affordable electric cars change the consumer’s demand or the quantity demanded of gasoline? Explain.
If there is an increase in the production of affordable electric cars then by demand and supply, we can say that as the supply might exceed the demand for electric cars, and the price of electric cars will decrease to clear the market. As we know electric cars are a good substitute for gasoline cars, and consumers will probably switch towards electric cars with the fall in prices. This in turn will decrease consumers’ demand for gasoline. Not only is that but due to the surge in the price of gasoline in recent years, consumers trying to substitute it for better and less expensive fuel. Palmer (2020) stated that the cost of running an electric car is much less than cars that run on gasoline (considering a period of 15 years). Again, according to Sturgis (2022) due to the rise of gasoline consumers are demanding more electric cars. Thus, if the production of affordable electric cars is increased, consumers are more than happy to substitute gasoline cars for electric cars which in turn decreases the gasoline demand. Electric cars are generally more costly than gas-fueled cars and charging the cars can be a bit inconvenient as well but when the costs of owning a car be it electric or gas-fueled it was found that electric cars are more cost-effective and can be easily maintained rather than gasoline cars (Winters, 2021).
References:
A Greenlaw, S., & Shapiro, D. (2017). [eTextbook] Principles of Microeconomics 2e.
All Answers Ltd. (November 2018). Relation Between the Oil Prices and the Sales of Automobiles. Retrieved on March 23, 2022, from https://ukdiss.com/examples/local-oil-prices-on-the-automobile-sales-economics-essay.php?vref=1
Chi, J. (2022). Asymmetric Gasoline Price Effects on Public Transit Ridership: Evidence from US Cities. Transportation Research Record, 03611981211069065.
Palmer, B. (2020, July 31). Electric vs. Gas: Is It Cheaper to Drive an EV? NRDC. Retrieved on March 23, 2022, from https://www.nrdc.org/stories/electric-vs-gas-it-cheaper-drive-ev
Sturgis, S. (2022, March 16). Gas prices are driving up demand for electric vehicles, but they’re hard to get. The Philadelphia Inquirer. Retrieved on March 23, 2022, from https://www.inquirer.com/news/electric-cars-cost-gas-prices-demand-20220316.html
Troderman, J. (2022, January 4). Crude oil prices increased in 2021 as global crude oil demand outpaced supply. U.S. Energy Information Administration. Retrieved March 23, 2022, from https://www.eia.gov/todayinenergy/detail.php?id=50738
Urbi, J. (2018, May 17). ENERGY Here’s what drives the price of oil. CNBC. Retrieved March 23, 2022, from https://www.cnbc.com/2018/05/15/what-drives-oil-prices.html
Winters, M. (2021, December 29). Here’s whether it’s cheaper to switch to an electric vehicle or not—and how the costs break down. Retrieved on March 23, 2022, from https://www.cnbc.com/2021/12/29/electric-vehicles-are-becoming-more-affordable-amid-spiking-gas-prices.html
