16 - Oil (1) Depleting natural resource, representing 34.5%...

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Unformatted text preview: Oil (1) Depleting natural resource, representing 34.5% of world energy supply in 2004 (IEA, Key World Energy Statistics 2004) Fundamental impact on world economy The second unknown is how expensive oil will affect the world economy. Past surges in the oil price have led to rises in inflation and interest rates that have triggered recessions. This time might be different, partly because growing demand, rather than a reduction in supply, has underpinned the price rise. That means it has been steady and gradual, giving consumers more time to adjustDearer oil will eventually curb demandbut at what price, and at what cost to the world economy, nobody knows. (Economist, Apr. 20, 2006) A recent study by the OECD concludes that oil prices at $120 a barrel could over the years reduce potential output by as much as 4% in America, and by 2% in the euro area (which uses less oil for each unit of GDP) Because machinery is upgraded only slowly, this impact is likely to feed through gradually, initially shaving 0.2 percentage points a year of America's potential GDP growth. (Economist, Sept. 11, 2008)- Yet for all that something has changed. Todays oil prices would have been unthinkable until very recently. Six years ago when a barrel of crude would be bought for as little as $20, oil prices at todays levels would have raised fears of deep recession [however, now] oil shocks do not hurt as much because oil is used less intensively than before. (Economist, Nov. 17, 2007) Oil (2) Economists at Morgan Stanley estimate that the fall in petrol prices from over $3 to $2.50 a gallon (the average is now $2.42) will alone have added some $78 billion to American purchasing power. (Economist , Sept. 28, 2006) Geopolitical importance Major source of environmental impact petroleum products account for 42% of U.S. global warming pollution (EDF, 2002) (EIA, 2008) Where Does it Go? U.S. Petroleum Flow, 2008 (Mil. Barrels Per Day) Consumer 1 = Residential, Commercial and Industrial and Electric Power, Consumer 2 = Transportation, Firm 2 = OPEC, Firm 1 = Rest of World Source: EIA, 2009 Calculating Market Demand for Two Consumers ($72) Demand for Consumer 1 q d1 = 60 5/6*72 = 0 + Demand for Consumer 2 q d2 = 120 10/6*72 = 0 Demand for Consumers 1 and 2 q dM = + = 180 - 15/6*72 = 0 = 180 2.5*72 = 0 180 120 60 18 90 60 30 36 54 72 Market Quantity Demanded (Mil. barrels/day) q dM = 180 2.5 P Cons. 2: Quantity Demanded (Mil. barrels/day) q d2 = 120 10/6 P Cons. 1: Quantity Demanded (Mil. barrels/day) q d1 = 60 5/6 P Price in Dollars P Individual and Market Demand Market Demand is the horizontal sum of individual demands at each price....
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16 - Oil (1) Depleting natural resource, representing 34.5%...

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