Supply & Demand : Oil

Economic Decisions

Team E

University of Phoenix

Economics

212

Ted Nordin

January 26, 2011

Supply, Demand and Price Elasticity of Oil

Condeleeza Rice said “The quicker we get about the business of reducing our reliance on oil the better.” America’s reliance on oil is a hotly debated subject; it affects the economy, the environment, and American lifestyles. Some argue that oil is a luxury whereas others state that is a necessity of modern life. It is clear that shifts in supply and demand have a dramatic effect on the economy and therefore businesses are seeking substitutes that would decrease America’s reliance on oil.

When considering the term oil, many people immediately think of motor oil and gasoline, both derivatives of the raw material crude oil. Crude oil, once processed or refined, transforms into several sub-products, which produces consumable goods Americans use every day. Medical and hygienic toiletry items, plastics, building materials, lubrication, clothing, and thousands of other products use refined oil by-products. In addition, oil is used for heating, cooling, and producing electricity. It is clear that America’s dependence on oil will not go away, and is part of many aspects of everyday life; therefore, oil is definitely a necessity and in high demand.

Oil does have a range of available indirect substitutes to reduce this demand; however, the oil by-product, gasoline, does not have a direct substitute. Car manufacturers are investing millions of dollars in research and development of more fuel-efficient vehicles and non-fuel dependent means to power vehicles. To reduce dependence on oil, synthetic motor oils and lubricants are available and oil and plastic recycling processes are increasing. Additionally, firms are using green energy concepts, like solar, wind, geothermal and hydrogen energy sources, to replace high oil consumption. These opportunities may help to reduce the need for oil, but it will not eliminate the demand...