Micro-Thoughts in Media. Mathematics & Economics Term Paper

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Micro-Thoughts in Media
Chosen for this assignment is an article titled “Saudi Arabia Promised More Oil. So Why Are Prices Rising?” The article was derived from The New York Times and was written and published by Stanley Reed on July 4, 2018, and the link to the article is /2018/07/04/business/energy-environment/oil-prices-opec.html . The author begins by questioning why oil prices are still on the rise despite the meeting held by major oil producers, whose result was to curb the increasing prices by ramping up production.
The author states that despite the pledge from major oil producers such as Saudi Arabia, as well as the Organization of the Petroleum Exporting Countries to increase total output, the prices have remained increasingly high. The author then proceeds to provide several reasons that are pushing prices higher which are: risky producers, supply and demand, and politicized markets.
The article highlights what has been done by the President to curb the stubbornly high oil prices and provides analysts’ perspective regarding the phenomenon. The article concludes by citing a telephone interview in which a prominent oil official warns that oil prices could spike to $100 or even $140 per barrel.
What happens when there is an alteration in the price of a commodity? According to chapter three of Nicholson and Snyder’s “Microeconomics and Its Application,” when the price of a good rise there are two subsequent effects: the substitution effect and income effect (2009, pg 90). With the increasing prices of oil, one effect that is evident is the substitution effect. The substitution effect refers to the effect on consumption because of a change in price holding real income or utility constant (Nicholson & Snyder, 2009 pg. 90). A prime example of the manifestation of the substitution effect is China. With the increased prices of oil, China has taken it upon itself to substitute oil with other sources of energy. The sales of electric vehicles are on a constant high, and there is strong growth in the dissemination of vehicles that use natural gas, particularly into buses and fleets of trucks. With the increase in oil prices, the individual demand functions (a representation of how the quantity demanded depends on income, prices, and preferences) changes. Thus, the amount of oil one buys depends on the price of the oil, the price of some related good, one’s income, and one’s preferences.
Even though major bodies in the oil industry to increase the total output of oil by 1 percent, there have been no changes in the prices. President Trump has further pressed the matter, continually calling for a reduction in oil prices. Despite all these, the prices are still shockingly high. This year, the price of Brent crude has spiked by over 20 percent to around $78 per barrel. Three factors constitute to the increasing prices: risky producers, supply and demand, and politicized markets.
Risky Producers: Saudi Arabia is experiencing an intense amount of pressure to increase its oil production; however, an increased amount of oil produced might not be sufficient to countervail declines in three states battling with crises: Venezuela, Libya, and Iran. Since these increases may not be enough, consumers might be forced to resort to other energy sources. One reason for the substitution effect when it comes to oil prices is consumers are looking for cheaper alternatives. Changes in the price of items such as bananas or chewing gum have little effect on purchasing power since the goods constitute less than 1 percent of total spending for most individuals. However, in some instances, income effects might be huge – alterations in the price of energy, for instance, can have severe impacts on real incomes (Nicholson & Snyder, 2009 pg. 95).
The Trump administration has softened demands that countries like India and China stop all oil imports from Iran. Nonetheless, the President has sought to organize support against Tehran as the U.S. gets ready to reinstate assents on its energy sector. Presently, Iran exports about 2 million barrels of oil daily, which translates to 2 percent of universal supply. However, the U.S. seeks to radically rein in Tehran’s capacity to sell its natural resources, taking away any added supply from Russia, Saudi Arabia, or any outside country. Analysts are of the opinion that the exports of Iranian crude oil are likely to decrease. A decrease in the export of Iranian crude oil would wipe out a substantial amount of the added supply that was pledged in Vienna.
Even though efforts are being made to combat this phenomenon, many countries are still resorting to other alternatives, which prove that oil has a high substitutability rate. The case with which one input can be substituted for another is of substantial interest to economists (Nicholson & Snyder, 2009 pg. 230). A prime example is the rising energy prices that were prevalent in the late 1970s. This resulted in the adoption of energy-saving equipment for many industries. Because they adopted energy-saving equipment, their costs did not spike rapidly as they were able to adapt to new circumstances. Other firms that were unable to make such substitutions had larger costs, and some even became non-competitive (Nicholson & Snyder, 2009 pg. 230). The substitution of oil is out of response to changing economic circumstances (Nicholson...