Oil Price Elasticity

Economics 100 Semester 2 2007 Assignment
Chapter 4 – Elasticity

A rising oil price not all bad news for citizens of an energy exporter
Vanessa Burrows
The Age
14 September 2007

Vanessa Burrows' article states that oil is becoming more and more scarce in the world due to an increase in the demand for fuel and a shortage of resources.   Through economic theory this essay will examine how and why there is a shortage of oil, and what is being done to increase supply, such as finding alternative solutions to the increasing fuel shortage.  

(express.howstuffworks.com/gif/oil-on-water.jpg - 2007)

Key points of this article:

• Oil prices have risen to a record $US80.18 a barrel
• Prices are expected to continue to rise
• "Australia seems to have a bunch of fairly small puddles, or pools, of oil…really starting to be extremely valuable" (Arden)
• The price of gas, a substitute good of oil, will rise as consumers switch from oil to gas power supplies

In today's increasingly highly consumer-driven society, the demand for goods has increased dramatically. This is pushing up the prices of all the raw materials needed in order to create these goods.   This rise in price is especially evident in the increase in oil prices, fuelled by:

• The scarcity of the raw material
• The war in Iraq, and
• The new focus on sustainability has also had an impact in regards to resources being spent on technology rather than supply.  

The lack of oil availability has meant that more money is being spent on technology in the hope of finding an alternative to oil scarcity, rather than on increased oil exploration and extraction.

Price Elasticity of Demand

Crude oil is an inelastic good.   It is used for operating motors, and for supplying power.   These uses have become a necessary part of life in western countries and economic centers of developing countries. Due to the consumer culture and the western mode of production, fuel has become essential in industry,... [continues]

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