Will+High+Oil+Prices+Crush+The+U.S.+Economy?+by+Jenny

TITLE OF EXTRACT: Will High Oil Prices Crush The U.S. Economy?

SOURCE: @http://blogs.cfr.org/levi/2012/02/24/will-high-oil-prices-crush-the-u-s-economy/

DATE EXTRACT WAS WRITTEN: Feb 24, 2012

DATE CURRENT EVENT WAS WRITTEN: Mar 6, 2012

EXPLANATION OF THE ECONOMIC THEORY RELATED TO THE ARTICLE: The reason why oil prices are rising is because, internationally, the demand for oil has gone up drastically. As the Law of Demand states, as a price of a product increases, demand decreases; and vise versa. Due to this rise in demand of oil around the world, the market for oil has been able to raise its prices because demand has gone up. There are differences between a rise in oil prices due to a rise in demand or simply supply cuts. The rise in oil prices looks more like a supply cut, rather than a rise in demand to America, due to the fact that the state of America's economy's status does not correlate with the oil market status. While the economy in America is in bad condition, the oil prices in America continue to rise. In theory, prices of everything in general will decrease if the condition of the economy is bad. This is because, because if demand is low, prices will drop. When the prices drop, demand will increase again. If the price fails to drop, the amount supplied and the amount demanded at that price will not be at equilibrium causing a surplus (demand < supplied). Suppliers lower the prices so that the amount supplied and the amount demanded will be at equilibrium (demand = supplied) eliminating surpluses. The reason for this increase in oil prices is due to a constant, intense rise in demand in other healthy growing countries like China and India. This causes the overall demand for oil to rise, which causes oil prices to rise. This increase in oil prices has not caused a surplus of oil in America, because other countries have been happily purchasing this oil, but has in fact, left the people in America unable to purchase oil.

VOCABULARY TERMS AND DEFINITIONS:
 * Supply: the amount of a good or service people or businesses are willing and able to provide at a given price
 * Law of Supply: As the price of a product increases, quantity supplied will also increase; as the price of a product decreases, quantity supplied will also decrease.
 * Demand: the amount of a good or service that consumers are willing and able to buy at a given price
 * Law of Demand: As price of a product increases, demand decreases; as price of a product decreases, demand increases.
 * Opportunity Cost: the 2nd best choice foregone when an economic decision is made
 * Subsidy: the amount of money paid by the government to a firm, per unit of output

DIAGRAMS:

EVALUATION: To improve the conditions of the current market state, the U.S. government could issue subsidies to oil companies that do not export oil to other countries and supply oil at low prices in America. The main issue with this would be the opportunity cost side – since the American economy is in a general mess, and the American government is highly in debt, this money might need to be used somewhere more important like supplying the unemployed with food and shelter. They could also set up a law that states that all American oil companies that take oil from American grounds must sell or give a certain percentage of their oil to America for a set price. This price would be set low enough so that oil prices in America would be able to escape the crazy rise in demand from the economically booming countries (China, India), that are causing the prices to rise worldwide. The government could also set up a price ceiling, which limits how high the price of oil can rise. This would be useful if the international market for oil wasn't booming. From the looks of it, if the government were to set a price ceiling, then many oil companies would just sell their oil to countries like China or India where they would take in more profit, making more revenue. This would not solve the problem – shortage of oil due to high prices that the people of America cannot afford. The main issue with some of these proposed solutions may lie in that problem that owners of the oil companies may conclude that they are not making enough profit to be breaking even (which means covering all opportunity cost) and leave the market and enter another market where they can make more. These solutions involve limiting the oil companies' profits, and this may cause those companies to be less motivated to keep working in that market (revenue is motivation). If a lot of these companies leave the market, even if the need for an adequate price for gas is met, the need for enough gas is still not met – there is a still shortage.