Homework 5 Q & A Fall 2021 10 04 2021 1 .pptx - Homework 5...

Homework 5
Answers

Question 1
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The global oil market is rather deep, liquid and that
crude oil itself is fungible. This means, stripped of the
technicalities, that one barrel of oil is much like another
one. This isn’t entirely true: Canadian tar sands oil,
Venezuelan stuff, they are both much heavier than most
others and need specific refineries to treat them. But
that light Arabian oil really is fungible. Refineries
around the world can make use of it at least to some
extent (indeed, some use it to blend with those heavier
ones to make refining easier).

Question 1 (continued)
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what this fungibility means is that it just doesn’t matter a
darn whether the US, or US companies, buy or not Saudi
oil. Total oil demand around the world will be the same,
total oil production around the world will be the same. All
that will change will be who buys what bit of oil. So, for
example, the US might buy more West African oil. But that
West African oil, before it was routed to the US, might
have been going to Europe. So, the US buys more West
African instead of Saudi, Saudi now sells more to Europe
and West Africa less. (Source: Forbes March 27, 2016
ald-trump-sure-is-confused-about-trade-oil-is-fungible/
?sh=59627ed82933)

Question 2
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P < min AVC.