The Effect of Domestic Oil Domestically
Section I: Summary of Article: North Dakota's Bakken Oil Finally Hits the East Coast
This is a short article written by Matthew Phillips of Bloomburg Business Week. It centers around the fact that oil from North Dakota is finally due to hit the East Coast in the near future. He highlights the economic benefits as well as giving his opinion on whether or not this will lower gasoline prices on the east coast. He concludes that the oil alone is not enough to cause a drastic price drop, but might be enough to prevent a price spike. The opinion is supported by economic principles.
Section II: The elasticity of oil.
Using the chart provided for us in our textbook we see that gasoline is inelastic, at least in the short run. For gasoline there are very few substitutes, it consumes a relatively small fraction of consumer budget (though that fraction is growing with increasing prices), and the product is a necessity (O'Sullivan, Sheffrin, and Perez).
Just because price goes up in gasoline doesn’t mean that people will stop buying it. For now, there are very few substitutes. People still have to work, get their kids to school and other activities, go to the store, and a variety of all other things. All of these things require gasoline in order to achieve. Therefore, even if Bakken oil hits the east coast for less than foreign oil, there is no incentive for the oil companies to reduce the price of gasoline. The positive not is that there is no incentive to raise the price of gasoline either. The only way that oil prices abroad go down is if there is a big enough supply of oil domestically that makes the price of oil radically cheaper and forces foreign oil to decrease their prices as a result.
In the long run, gas becomes more elastic as alternatives develop. Electric and hybrid cars are an example of alternatives. However, as of now they are fairly expensive alternatives; the price increase you pay for these alternatives offsets the price of gas you pay with regular cars. However, even in the long run gasoline maintains a certain amount of inelasticity. “Estimates of long-run consumer demand elasticity suggest that a 10 percent price increase will result in only a 6 percent decrease in consumption.” (Silvia, Meyer, and et al). Though Bakken oil hitting the east coast is great for the economy and a good start at using domestic oil, due to its elasticity it is not enough to greatly affect prices of gasoline.
Section III: The price of oil
The world price of crude oil is the most important factor in the price of gasoline (Silvia, Meyer, and et al) and the price of crude oil is set in the global market (Ydstie). In translation that means that the price of oil out of North Dakota will not be that much less than foreign oil, especially after transportation cost. The article suggests that after all transportation and fees that the price will be roughly $7 dollars less a barrel. While seven dollars is a decent cut, especially over millions of barrels, it is likely not a big enough decrease to justify a dramatic decrease in the price of gasoline. As you can see from the chart below (Silvia, Meyer, and et al) the price of domestic oil mirrors
closely that of the price set on the world stage. So, just by sending a portion of oil out of North Dakota to the east coast will not necessarily decrease the price at the pump. In order to do that there has to be enough to effect to world’s supply of oil, something the United States can’t do or is not willing to do at this time.
Section III: Supply and Demand
Normal Supply Curve
Normal Supply Curve
In a normal supply and demand