The effects of a fall in the Supply of Oil?
As supply shifts to the left this will cause an increase in the price of oil and therefore there will be a fall in demand for oil. There will also be a corresponding increase in the price of petrol and diesel because they are made from oil.
However although the price has increased there will only be a small fall in demand because demand is inelastic. This is due to the fact there are not many close alternatives and petrol is a necessity at the moment.
Firms producing oil will benefit from an increase in revenue. This is because the increase in price is much bigger than the fall in demand. This might encourage oil firms to look for new sources of oil. For example it may now become more profitable to extract oil from the Antarctic. Therefore in the long run there may be an increase in the supply of oil which brings prices back down. However if oil is running out and supplies are exhausted they may look at different sources of energy to maintain their long term future. E.g. BP now have a slogan “Beyond Petroleum”.
In the short term demand from consumers is also inelastic because they are used to using petrol cars. However if the price stays high for a long time they may also look for alternatives. Therefore there could be an increase in demand for substitutes e.g. public transport or cars which run on hydrogen. Therefore in the long term demand for oil could become more price elastic.
The effect of a fall in supply in oil will effect countries who are oil importers the most. E.g.China and Japan will face increase costs of production and this can lead to cost push inflation. There are also other macro economic effects such as lower rates of growth and balance of payments problems.
See also: Should we be concerned about running out of oil?
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