Iran+oil+loss+would+dramatically+widen+gap+between+would+supply+and+demand+by+G+Ping+Lee

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=TITLE OF EXTRACT:= Iran oil loss would dramatically widen gap between world supply and demand =SOURCE:= Gulf News http://gulfnews.com/business/oil-gas/iran-oil-loss-would-dramatically-widen-gap-between-world-supply-and-demand-1.988818

=DATE EXTRACT WAS WRITTEN:= March 2, 2012

=DATE CURRENT EVENT WAS WRITTEN:= March 5, 2012

=EXPLANATION OF THE ECONOMIC THEORY RELATED TO THE ARTICLE:= Oil is a natural substance that is used as fuel in many countries. The supply of oil is dominated by several monopolies although the goods and services is the exact same among different producers, it is still largely dominated by Iran as they have the most of this resource. Currently oil supplies in Iran are dropping as oil is a natural good and the natural supply of oil is diminishing. This also causes an increase in the costs of retrieving the oil and exporting oil to other countries. This increase in price of the production of oil will naturally drive the prices of oil up, as a firms goal is to profit, thus shifting the supply curve to the left. Prices for oil drastically increase, and the demand remaining constant as oil is a relatively inelastic product. In order to find alternatives for oil, America has headed towards its OPEC members whom have collusively agreed upon a price. However oil supply is limited. As it can not be produced, the worlds supply of oil is also decreasing, causing a eventual leftward shift in the supply of the world oil industry in the long run(this can be seen in the diagram by the S1, S2, S3 curves). As they remain at a constant price, the amount able to be supplied by the world industry of oil is a lot less than the demand. This causes a shortage in supply of oil.The dilemma is to whether to comply with the large increase in Irans oil prices or to continue to consume the worlds oil supply which may in turn drive up the prices there too. The problem with sanctions against iran is that as Iran greatly defines the oil industry, sanctions against Iran will create a large leftward shift in the world supply of oil, and in the long run, will skyrocket prices.

=VOCABULARY TERMS AND DEFINITIONS:=
 * Supply = The amount of a good or service that the producers are willing and able to produce
 * Demand = The desire of buyers for a specific good or service
 * Prices = The amount of money that is required for a good or service
 * Oversupply = Supplying more of a good or service than what is demanded
 * Shortage = When there is less supply than the demand for a specific good or service
 * Monopolistic Competition = Where many firms supply similar goods or services
 * Monopoly = A firm that dominates the industry
 * Inelastic = Where a change in the price of a good or service does not affect the demand by much

=DIAGRAMS:=

As the supply of oil in Iran decreases, the supply curve shifts from S1 to S2 thus increasing the prices of the oil. This is what occurs when Iran's oil supply is removed from the world oil industry. It creates a large leftward shift from S1 to S2 thus driving the price of oil up whilst quantity demanded does not greatly decrease as demand is inelastic. If the prices were to remain at the same prices whilst supply eventually diminished. A shortage will occur as the amount of oil able to be supplied at a given price is a lot less than the amount of oil demanded. =EVALUATION:= Ultimately as oil is considered an inelastic product, the rising of price will directly affect the consumers of oil. The rising cost of oil will cause the government to lose total revenue. As oil prices continue to increase, there will be an opportunity cost as the government will be unable to fund other programs such as education and progress of the nation. In attempts to ease the situation, the American government can offer subsidies for Iran, as if Iran had some financial support the decrease in prices of oil will negate the effects of the increase in price of oil. This subsidy will allow the supply and demand curve of oil to remain constant and not increase or decrease both the quantity demand and the price. However every subsidy has an opportunity cost as there are other areas in which the government can use this money. For example improving peoples welfare, or increasing literacy rates in order to better their countries HDI. Another problem is that in order to provide a subsidy the government must first impose more or higher taxes which still forces their citizens to lose money just in a different way. Another method is to provide alternative methods of fuel. As oil is usually used as a fuel, by finding an alternate fuel or substitute, the government will be able to decrease the demand for oil which will move the demand curve leftwards and settle at a new equilibrium.