In early 2017, an article in the Financial Times about the oil market quoted the
ID: 1162234 • Letter: I
Question
In early 2017, an article in the Financial Times about the oil market quoted the chief economist of ail company BP as saying Pricing pressure is likely to come from the supply side, because of strong growth in US shale oil (crude oil found within shale formations), and the demand side as the rise of renewable energy, including electric vehicles, gradually slows growth in oil consumption. After reading this article, a student argues:"From this information, we would expect that the price of oil will fall, but we don't know whether the equilibrium quantity of oil will increase or decrease. Source: Andrew Ward, "BP Warns of Price Pressures from Long-Term Oil Glut," Financial Times, January 25, 2017. Is the student's analysis correct? In the market for oill, the effect of the increasing use of electric vehicles is the demand curve will In the market for oil, the effect of growth in U.S. shale oil is the supply curve will The new market equilibrium will be where O A. the new demand curve intersects the new supply curve O B. the new demand curve intersects the original demand curve. O C. the new demand curve intersects the original supply curve. D. the original dem and curve intersects the new supply curve The student's analysis is O A. incorrect, because the equilibrium price may or may not decreaso OB. correct. O C. ncorrect, because the equilibrium quantit O D. incorrect, because the equilibrium quantity will decrease y will decrease but the equilibrium price may or may not decrease Click to select your answer 10Explanation / Answer
Ans. Yes, the student’s analysis is incorrect.
In the market for oil, the effect of increasing use of electric vehicles is the demand curve shift leftwards.
In the market for oil, the effect of growth in US shale oil is the supply curve will shift rightwards.
The new market equilibrium will be where the new demand curve intersects the new supply curves.
The student’s analysis is incorrect because the equilibrium price may or may not decrease because it depends of supply of oil in the market. Production cuts will increase the prices.