Market_Equilibrating_Process

Market Equilibrating Process Nikki Morris AGMBA1009A OPS/561 August 2, 2010 Dr. Augustine Hammond Abstract This paper will explore the effects the British Petroleum oil spill in the Gulf of Mexico has had and will have on the economies supply and demand for oil. Discussion on the market equilibrating process will occur as will an application of this to this current disaster. Market Equilibrating Process Oil Spill in the Gulf of Mexico The British Petroleum (BP) oil spill is the largest in history releasing more than 100 million gallons of oil into the Gulf of Mexico. The oil spill is causing many drivers to question if and how it will affect the price of gasoline. The Energy Information Administration (EIA) does not project much change beyond the usual 10 to 20 cents increase that occurs each summer based on the current cheap global price of and the United States demand for crude oil (McClendon, 2010). Part of the reason is there has been no immediate disruption of crude oil to the United States refineries as the oil rig was doing explorations to prepare for future oil production and would not have been used to make gasoline this summer (McClendon, 2010). In contrast, the previous largest oil spill in history, the Exxon Valdez, was carrying oil to a refinery thus affecting gas prices. Although the oil spill does not directly affect the amount of crude oil and thus increase the price of gasoline, the oil spill itself can disrupt the shipping traffic, may hinder production at other offshore rigs, and new drilling restrictions may create cost burdens that could be passed on to consumers (McClendon, 2010). Market Equilibrium According to McConnell, Brue, and Flynn (2009), establishment of equilibrium price and quantity occurs when the market demand and the market supply adjust prices to a point in which both of these are equal. This will be found at the intersection of the supply and demand curves. A change in the supply or the demand will alter the equilibrium price and quantity (McConnell, Brue, & Flynn, p. 62). Affects of Oil Spill on Current Market If the oil rig in the Gulf of Mexico was indeed a production rig, then the supply would have decreased causing the intersection of supply and demand to be at a lower equilibrium price but at a higher equilibrium quantity (McConnell, Brue, & Flynn, p. 56). This would cause our current gas prices to rise. As indicated above, the oil spill may impede production of other oil rigs in the Gulf of Mexico as well as the transport of oil to refineries for processing. Future restrictions placed on oil drilling will also affect the production of crude oil to be taken to refineries. These three different issues are indirect results from the oil spill, which can cause the same issue of a decrease in supply. Conclusion The British Petroleum oil spill in the Gulf of Mexico currently has not caused any direct impact on the supply of crude oil but may be responsible for future indirect impacts. This will ultimately affect our current supply of oil causing a decrease in supply, which will in turn cause an increase in the equilibrium price causing our gasoline prices to increase. References McClendon, R. (2010). www.mnn.com. Mother Nature Network. Retrieved from http://www.mnn.com/earth-matters/translating-uncle-sam/stories/will-oil-and-hurricanes-raise-gas-prices McConnell, C. R., Brue, S. L., & Flynn, S.M. (2009). Economics: Principles, Problems, and Policies (18th ed.). New York, NY: McGraw-Hill/Irwin