The price of crude oil increased to its highest level due to conditions which impacted supply. Historically, crude oil has traded at between 70 and 150 USD per barrel. But the price increased to over 200 USD in March 2022. Growing demand in Canada for crude to be turned into refined petroleum, coupled with a sharp fall in production in Saudi Arabia have both been factors in the price increase. Bauxite production in Saudi Arabia for 2017- 18 fell 65% year-on-year due to an agreement with OPEC. The Energy Information Administration predicts that global consumption of crude oil is likely to be greater than production by 20 million barrels this year. In the US, companies in the steel and alumina industry have put pressure on the US government to relax import controls, warning that otherwise they might run out of petrol. Commentators predict that most steel and alumina producers will be unaffected because crude is such a small part of their spending. a. Explain, using supply and demand analysis, why the price of crude oil has been increasing recently. Do you think a) the supply and b) the demand for crude oil is price elastic or inelastic? Justify your choices and explain whether this means any given change in supply or demand will have a bigger effect on the equilibrium price of quantity. Illustrate the predictions of the Energy Information Administration and explain how this will be corrected. How might companies in the steel and alumina industry react to an increase in the price of crude oil?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The price of crude oil increased to its highest level due to conditions which impacted supply. Historically, crude oil has traded at between 70 and 150 USD per barrel. But the price increased to over 200 USD in March 2022. Growing demand in Canada for crude to be turned into refined petroleum, coupled with a sharp fall in production in Saudi Arabia have both been factors in the price increase. Bauxite production in Saudi Arabia for 2017- 18 fell 65% year-on-year due to an agreement with OPEC. The Energy Information Administration predicts that global consumption of crude oil is likely to be greater than production by 20 million barrels this year.

In the US, companies in the steel and alumina industry have put pressure on the US government to relax import controls, warning that otherwise they might run out of petrol. Commentators predict that most steel and alumina producers will be unaffected because crude is such a small part of their spending.

a. Explain, using supply and demand analysis, why the price of crude oil has been increasing recently.
Do you think a) the supply and b) the demand for crude oil is price elastic or inelastic? Justify your choices and explain whether this means any given change in supply or demand will have a bigger effect on the equilibrium price of quantity.
Illustrate the predictions of the Energy Information Administration and explain how this will be corrected.
How might companies in the steel and alumina industry react to an increase in the price of crude oil?

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