The price elasticity of demand for oil tends to be inelastic because oil is a necessity, therefore, there is no substitutes for the product because it is currently the most common fuel used in the world. Given that the events happened in a short period of time, PED becomes even more elastic because the consumers do not have time to consider other alternatives, or consider if they really need the product. This means that the consumers are willing to pay for the product at any price.
The price elasticity of supply for oil(PES) tends to be inelastic as well, as we can assume that it is being produced in its full capacity and the time period is short, and firms do not have the ability to change the quantity demanded for such good is a short period of time. Oil also does not have many substitutes, and firms have little flexibility to change their production pattern.
The increase in price of oil is primarily caused by 2 factors, a shift in demand for oil due to snowstorms in the United States and the strike in Venezuela. Due to a change in weather in United States, consumers demand more oil. As depicted above, there are few substitutes for oil and the time period is short, so consumers are willing to pay a much higher price. The demand curve shifts to the right (from D1 to D2)
The strike in Venezuela reduces the amount of labor, a factor of production, thus slowing down the overall production of oil in the country. Therefore, the supply level in the oil market decreases due to the decrease in resource (labor) and cause the supply curve to shift to the left (from S1 to S2)
The increase in demand would cause the equilibrium price to increase significantly compared to the increase in supply. This is due to the inelasticity of demand. However, when the supply curve shifts to the right, the price decreases as well. Conversely, this would cause the equilibrium quantity to decrease, due to the inelasticity of supply. Overall, the price decreases significantly, while the quantity of oil in the market is likely to change slightly, but the direction is ambiguous.
Although current political standpoint of the United States does not affect the oil market, the price and quantity and change significantly if war is declared. More oil would be demanded, thus raising the price. Overtime, the supply would increase as well, and the curve would be more elastic, as the firms have more time to increase their production capability, this would cause the price to slowly decrease.
