Essay about Oil Price Hikes

909 Words 4 Pages
The price of oil intends to spark the chaos in the world economy. This spark lately has been in Middle East. In recent history, the spark came from, “the Arab oil embargo of 1973, the Iranian revolution in 1978-1979 and Saddam Hussein's invasion of Kuwait in 1990...” (Economist). “The Middle East and North Africa produce more than one-third of the world's oil.” (Economist). The situation in Libya are worsening which causes the oil output of Libya to halves. Unrest across the region are spreading, threatening a wider disruption. The price of Brent crude has jumped 15%, reaching $120 a barrel on February 24th. (Economist). Supply disruptions causes oil price to increase and could increase inflation. The lasting effects may bring …show more content…
It was expected for oil firms to discuss of what will happen in the future, likely a shortage in oil supplies means increases in price. The graph :The oil firms have lost some of their supplies.
This forces them to raise their oil prices as shown on the graph. The shift from Supply1 to Supply2 represents the increase in prices after shortages in supply. The numbers are unrealistic examples.

The Law of Demand is a negative relationship between price and supply. If the prices goes up, the supply will go down and vice versa. Shifts in demand can affect consumers' tastes, preferences, income, and price of substitutes. The hike in prices can leave a bad taste in consumers and affect their preferences to shift to substitutes. However, because substitutes are very limited over oil, the switch to substitutes proves to be difficult. This is mainly due to time dimensions. In the short run, majority of consumers, if not all, intends to stay on course despite the price hike. In the long run, consumers will begin to find substitutes.

The oil firms already aware that they are unable to operate their maximum efficiency with the Libya issue. This is called Production Possibility Curve. As shown on the graph, before the Libya crisis, the oil firms were running on max efficiency which is PPC1. When the Libya crisis began, the shift has put the oil

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