Economic Profile of the Oil Industry

Economic Profile of the Oil Industry

Axia College of University of Phoenix

Oil and gas has become a very talked about topic in most recent years. Oil prices have recently hit all time highs and continue to rise at a rapid rate. In 2004, the United States demand for oil was 20 million barrels per day. Today the United States uses more oil than any other country, approximately 20.7 million barrels per day. In second place is China with 6.5 million barrels, quite a large difference, more than three times the amount of China. The entire world consumption is 83.5 million barrels a day; the United States uses about one quarter of that amount. The United States imports about 60% of its oil consumption from other countries. The USSR used to be the highest producer of oil, but since 1988 it has declined almost 30% production. Currently Saudi Arabia produces approximately 9 million barrels a day and its production depends on OPEC quotas and prices.

Price elasticity of demand is the percentage change in demand caused by a one percent change in price. It often predicts that a one percent increase in the price of a product will result in a two percent increase in quantity demanded. When demand is responsive to price, it is elastic. Gasoline prices however are relatively in elastic, when prices change; there is fairly little change in the quantity demanded. This is why, when the world supply of petroleum changes, a large change in price is usually needed to bring supply and demand into balance. Another factor of high gasoline prices is the tax buyers are being charged. Tax on goods raises the price. When demand is inelastic the buyer bears the entire tax burden. A decrease in production of crude oil results in lower supply. Tax is increased due to a decrease in supply.

It has been proved that the reserves are depleting rapidly, now at approximately 1.2 billion barrels. Gas prices have risen to all time highs; some analysts predict gas will break...