South-Western College Publishing - Economics  
Oil Price Hike Mystery: Was it Done Using Control Over Crude Oil Supply in the Middle East By OPEC?
Subject Comparative statics
Topic Equilibrium
Key Words Price, oil, inflation, economic growth, production, exports, OPEC, taxes, regulations
News Story

The price of a barrel of oil was around $10 in the late 1990s but is now over $30. The U.S. and other industrialized countries are concerned at the high level of oil prices because it may increase inflation and prejudice economic growth. They have pressured the Organization of Petroleum Exporting Countries (OPEC) into increasing oil production modestly by 700,000 barrels a day to 25.4 million. OPEC is anxious to avoid low prices and profits, but the danger for the West is that the benefit will be insignificant.

Non-OPEC countries may provide relief. For example, Mexico has promised to increase oil exports. Norway may follow suit.

OPEC refuses to accept the blame for high oil prices. It states that the price of crude is only 30 percent of the pump price in the U.S. Taxes and new environmental regulations on gas blends in some areas bear some responsibility.

(Updated August 1, 2000)

1. Oil prices have tripled. Western governments are concerned. Using a supply and demand diagram, show how higher oil prices can cause lower economic growth and higher inflation. Explain what you have drawn.
2. Draw a supply and demand diagram of the market for gasoline. Show the effects of the following factors on the equilibrium price and quantity of gasoline and explain what has happened
  a) a lower supply of crude oil by OPEC
  b) higher government taxes
  c) more environmental regulations on which kinds of gasoline can be used
3. OPEC and non-OPEC countries promise to increase their sales of crude oil.
  a) Draw a supply and demand diagram of the market for crude oil. Show how this will affect the equilibrium price and quantity of crude oil.
  b) Observers believe that the effect on the equilibrium price and output of crude oil will be insignificant. Why might this be the case?
Source Steven Komarow, "Oil boost won't lower gas prices," USA Today, June 22, 2000.

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