Economics Oil Prices

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Oil Prices
Task 1: Visual Representation of the Data

Price of Crude Oil Between March 1983 and December 2002
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Price of Crude Oil Between March 2003 and December 2008
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Price of Crude Oil Between March 1983 and June 2010
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Over the Periods of March 1983 and December 2010 there are 3 main trends that must be pointed out. The first trend is that whenever we see a sharp increase in the price of oil we see a sharp decrease in the price or vice versa just as quickly. This can be acknowledged earliest through the March 1986 and March 1990 quarters. The second noticeable trend is the overall increasing trend of oil prices over the period. However this trend only really began after 2003 as is here we can clearly see that oil prices begin to steadily rise. Prior to this oil prices were only fluctuating between the $40 and $15 per barrel mark. The last trend is that the real price of oil has followed the trend of the nominal prices of oil and fluctuate between 1983 and 2003 before steadily increasing from 2003 to 2010. However we can see that especially during the increase after 2003 that the real price of oil has not increased as much as the nominal price. We are able to be sure of this by identifying the gaps between the 2 prices. In December 1989 we see only an $8US difference between nominal and real prices however in December 2005 we are able to see a $30US per barrel difference between real and nominal prices therefore meaning that the nominal price of crude oil has increased at a greater rate than its real price.

Task 2: Implications for the Consumer
(a) i

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As shown in the above graph the actual demand for km travelled will not change with the rising oil prices. This is due to the fact that travelling has become a necessary function in today’s world if we are to carry out our typical day-to-day activities. This makes Km travelled inelastic meaning that even though price changes the good will still be demanded in the same quantity. Even though people may cut their overall km travelled through their own motor vehicles which it can then be argued would result in a decrease in the total demand for Km travelled. Consumers will still need to make up this travel distance via the use of public transport or taxis. This therefore results in total demand for transport being unaffected by the increase or decrease in oil prices.

ii)

Oil Price
($US Per Barrel)

Hours Usage of Motor Vehicles Per Week

With this graph we see the with price of oil at $100US per barrel, the total demand for motor vehicle usage in hours per week is quite low (only 1 hour). However once the oil prices begin the drop demand for motor vehicles begins to rise accordingly, for instance being 8 hours of driving if the price were to be $30US per barrel and 10 hours if the price were $10US per barrel therefore clearly showing the relationship between oil prices and hours of motor vehicle usage.

iii)

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From the analysis of this diagram we are able to see the demand for both 4-Cylinder cars and 6-Cylinder cars at different oil prices. We can see that once oil prices begin to rise the demand for 4-Cylinder cars begins to rise and similarly the demand for 6-Cylinder cars begins to fall. This shows that the consumer is substituting his willingness to purchase a 6-Cylinder car with a 4 Cylinder car as they become more economical as the price of oil begins to rise.

(b)
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Rising oil prices have a large impact on the demand for inner city and outer suburb housing. When oil prices are at $100US per barrel only 1 house will be demanded in the outer suburbs compared to 10 when oil prices are at $10US per barrel. This is due to the fact that the costs of living in the outer suburbs are higher in terms of transport compared to living in the city. Similarly When oil prices are at $10US...
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