Oil Prices Plunge

            To put in simple words, this article mainly explains the surprising decrease in price when 60 million barrels of crude oil were released from Libya. The whole point of releasing a great amount of crude oil to the world was to decrease the high prices that were being distributed for gasoline to avoid a recession. As consumers are using gasoline in their car daily, the amount of gasoline available is slowly decreasing. When too much is used, the supply of gas will also decrease, which caused an inward shift in the supply curve. With supply shifting inward, demand remains the same and according to the law of equilibrium, the market will adjust itself to meet the equilibrium price which is higher than it was before.

            The same also occurred when the US and their allies decided to release 60 million barrels of crude oil. It is mentioned that we consumed more than that amount in a day but the amount released was enough to cause a decrease in the pricing. This is the total opposite of the earlier case. Because supplies have increased, the supply curve will have an outward shift causing the equilibrium point to be at a lower price, and in this case, the lowest price has been since the four months prior, and according the International Energy Agency, this new price level will help the economy from going into a second recession.

            As we learned in our more recent classes, the price of oil is determined largely by the group OPEC. Only in an oligopoly where everyone can trust one another can they set the price, even though it based on demand. Assuming that the members of OPEC all got together to decide the amount of oil to release and the price to set, this well trusted oligopoly strategized their whole market to ensure that everyone is charging the same amount, therefore; no one will be able to gather all the consumers because of cheaper prices.

            Demand is generally very inelastic with gasoline due to its necessity in people’s lives. Therefore in order to change the price of crude oil, or gasoline, a shift in the supply curve must occur, whether it is inwards of outwards. Also because a second recession is extremely unwanted among the nations, the US and their Allies have decided the best way to decrease the chance of a recession is by increasing the amount of oil being released.

http://www.washingtonpost.com/business/economy/oil-prices-plunge-after-us-allies-announce-release-of-reserves/2011/06/23/AGsANYhH_story.html

-Tien Nguyen