Is the world in for another oil shock?

The Middle East and Africa produce over one third of the world’s oil. The Economists explains how there were three devastating oil crisis’ that caused a lot of unrest throughout the world, the Arab Oil embargo in 1973, Iranian Revolution in 1978-79, and Saddam’s invasion of Kuwait in 1990. Unfortunately, according to the article consumers have good reason to be concerned for another oil shock. In the article, the author explains how Libya’s turmoil could interfere with oil supply. The output of Libya’s oil supply has decreased by half. The Libya oil crisis could potentially cause this unrest to spread across the region and cause there to be an oil deficiency through out the Middle East. Luckily, the reaction on the market has not been that destructive. As the violence in Libya increased the price of Brent crude by 15% and, on February 24^th the price of barrel was up to $120 dollars. But since, Saudi Arabia said they would produce more oil it forced the prices to drop to $116 due to the law of demand. Due to the fact, gasoline is an inelastic good consumers are not very sensitive to the changes in price, which means that gasoline is essential to consumers. Although, gasoline is an inelastic good, economists are still concerned that the decreased supply in oil will cause the prices to escalate to an all time high and that the reduced supply could boost inflation. Fortunately, the Libya oil crisis has only decreased the world’s oil supply by 1%. Comparing to the crisis in 1973 where oil production decreased by 7.5% the 1% decrease does not seem that severe. Although, the prices are of oil are rising due to the oil crisis there is another reason that prices are raising as well. Prices of oil are increasing to the lack of supply of oil. Firms are raising prices in order to hopefully decrease the demand of oil because due to the law of supply when there is a shortage there is an upward pressure on prices. There are additional concerns about the affects of oil prices on inflation. Economists are concerned that if the prices of oil keep raising the increase in prices will fuel inflation. Inflation causes consumers to be less sensitive to price changes as well. Hopefully the problem will eventually work itself out and the unrest in Libya will cease so, there will be less concern about the production of oil. Until then there is some serious apprehension about the world’s production of oil.

http://www.economist.com/node/18281774