Micro Economics- Oil Prices

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Isabel Harvey

January 11, 2009

“Oil Prices Low? Chevron CEO Says No”

Word Count: 650

The article “Oil Prices Low? Chevron CEO Says No.” comments on the constantly increase of oil prices. The increase in price is due to high consumptions of oil, and the tightening supply. The article talks about the problems the US  is facing, the supply and demand imbalance, the causes and solutions proposed.

In the summer of 2008, the price of crude oil hit its highest price at about $145 per barrel, which equals about $3.45 per gallon, an unsustainable level. Since the price of crude represents more than half the price of gasoline at the pump, gas price soared to $5.00 per gallon, a record (see figure 1). Although the prices have lowered, they are still considered pricey at $60-$70 per barrel, and just a decade ago crude was lower than $10. Such high pricing of the oil was caused by a sharp increase in demand. For example USA has about 5% of the world’s population, but consumes about 25% of the oil supply. Global demand of oil is increasing due to a variety of reasons like strong economic growth of China, India and other developing countries are encouraging consumers to purchase cars increasing demand of oil, The industrialized world is also expanding, people are purchasing bigger cars and homes that consumes more energy. The world now consumes 3.6 billion gallons of oil a day. By 2030, global demand for oil is projected to be just over 35 percent (see figure 2).

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A direct effect of such rapid increase in demand of crude oil has been to tighten the world’s supply. Increasing the supply to meet the demand has been a problem, better technology would be needed to reach more difficult to access resource; supply is also aggravated by political instability in war countries and re-occurring weather problems such as hurricanes. In addition, the weak dollar has added economic pressure on crude oil prices, crude commodity is traded in dollars on the world wide market. These  record high gas prices sent a signal to the market that the demand needed to ...

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