Friday, June 7, 2013

The End of Elastic Oil



Written by: Bailey Zimmerly 
The End of Elastic Oil

          Oil, a commodity unlike any other, the basis of transportation, and the wealth of nations is changing. There is no current shortage of oil, but oil reserves are becoming more difficult to drill. “The oil supply is becoming less elastic as new oil supplies come increasingly from unconventional oil” (Konrad). Simply put, consumers are reacting more to more severe changes in oil prices and any change in the price of oil produces a small change in supply. Over the past decade this shift can be seen.
            Back in the 1990s consumer reaction to oil was not as high. The demand was extremely inelastic. Consumers thought the oil supply would never end and production was not highly regulated. However now, at least in the long run, the demand elasticity for oil can be more elastic. This is being done through carpooling, moving closer to work, and driving more fuel efficient vehicles. Replacing a car or moving may be unrealistic in the short-run, but in the long-run it becomes more possible therefore a change in elasticity is possible. However, if oil prices continue to rise, especially at an exponential rate, then the economy will not be able to adjust, therefore hammering the country with higher unemployment rates. However, another side has to be taken into consideration.
            Supply side elasticity has remained steady throughout the 1990s with little regulation. However, now with a strict oil limits amongst the countries of OPEC, supply will now remain constant with a rising price therefore forcing supply to become nearly perfectly inelastic. This problem haunts many of the top world consumers of oil. In the past supply would always adjust to the demand side of the economy for oil, however a change is coming.
            With this shift away from the elastic supply of oil, countries such as the United States are going to have to make many critical changes to prevent disaster from soaring oil prices. Simple changes such as increased investment in public transportation and encouraging people to carpool are short term fixes. However, long-term plans including improving the nations rail system to shift from truck to rail as well as encouraging the electrification of transportation. Finally, to help pay for these changes an increase in the gas tax at a slow and predictable rate over time to provide funds for the nations improvements as well as to signal consumers for the prices above.
            With the improvements listed above the United States and oil consumers around the world will be more able to adjust to higher gas prices with a continued limited supply. The markets need to encourage alternative uses in the transportation sector in order to make it a successful long-run superpower in the future.


Cited:
 "The End of Elastic Oil - Forbes." Information for the World's Business Leaders - Forbes.com. N.p., n.d. Web. 6 June 2013. <http://www.forbes.com/sites/tomkonrad/2012/01/26/the-end-of-elastic-oil/>.

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