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Midterm - 4 The recent oil price increase has not had the...

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3. The likely impact of Clinton’s suggested action is that oil prices will go down in the short run. Oil has both low price elasticity of demand and supply in the short run. The halting of filling the SPR will increase the supply of oil, shifting the supply curve to the right, resulting in a decrease in price. In the short run, supply is price inelastic because it is a lengthy process to find and develop oil. Having said this, in the long run there is price elasticity, which is one of the reasons why this may not be a long term solution. The SPR has also been tested where oil has been released and the result was a decrease in oil prices.
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Unformatted text preview: 4. The recent oil price increase has not had the same impact as prior episodes because earlier episodes had unaccommodating monetary policies, oil price shocks, or both. The recent price rise can be characterized as a steady increase because of demand increase as opposed to a price shock. In contrast, 1980s oil prices and an unaccommodating monetary policy negatively affected the economy. Based on recent Fed’s interest rate activity, one can make the argument that the monetary policy has been accommodating to the price change. These two factors reduce the negative impact the oil price increase has on the economy’s growth....
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