Article Analysis Paper The United States consumes more than 25% of the world’s petroleum products which is a large percentage, considering only 3% of the world’s oil reserves are produced by the United States. Given the demand for petroleum products such as gasoline, understanding why Crude oil prices have skyrocketed in recent years, is not hard. According to the article “Ending America’s Oil Addiction,” the surge in crude oil prices can be reduced in large part to the simple concepts of supply and demand. Cooper, 2008) This paper will define terms such as economics, micro economics, the law of supply, the law of demand and the factors which lead to a change in supply and demand. This paper will also summarize the article and explain the basis for the trends in consumption patterns as discussed in the article and describe what occurred to change the demand for crude oil, or the supply of crude oil and market prices of such crude oil. Economics and Microeconomics An understanding of the basic principles of economics is necessary to understand trends in consumer consumption patterns. Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political reality of the societies. ”(Colander, 2004, p. 4) Economics is a science which deals with the production and distribution of products as well as the consumption of such products. Microeconomics is the branch of economics which deals with items such as “pricing policy of firms, households’ decisions on what to buy, and how markets allocate resources among alternative ends. ” (Colander, 2004, p. 4) Specifically, microeconomics focuses on the laws of supply and demand. Situation Summary of the Article The article provides a historical summary of consumption patterns of crude oil by providing long-term trends which span from 20 to 50 years, including an analysis of the trends in the consumption, expenditures, imports and prices of crude oil. The analysis of such trends reflects a complex set of factors which affect the consumption patterns of consumers. According to the article the long-term trend in gasoline consumption has four points of interest which are 1973, 1979, 1992, and 2004.
In 1973 the Arab oil embargo occurred which resulted in a slight downward shift of crude oil consumption and in 1979, the year the Iranian revolution occurred, the consumption of crude oil took an even sharper turn downward as prices soared to $. 75 per gallon which was a 120% increase. After 1979, consumption continued to grow slowly compared to prior years and gas prices declined. The article suggests that the downward trend in consumption may be due to the passage of the Corporate Average Fuel Economy Standards (CAFE) in 1975.
CAFE required automakers to increase the fuel economy of the cars which were being produced. Over the years the CAFE requirements stopped increasing and in 1992 the consumption of gasoline increased drastically and prices remained stable. This trend provided automakers with no incentive to improve the fuel economy of the vehicles which were being produced. In 2004 the consumption of gas stopped its upward trend and flattened out to the point of a very slight decrease, but the demand remained constant.
The article suggests that with the constant demand for gas the prices have continued to rise over a longer period, resulting in an increase of over two dollars a gallon since 2002. Such increase represents a 150% increase from the highest price in 2002. (Cooper, 2008) The Law of Supply The law of supply states that “the quantity supplied rises as price rises, other things constant. ” (Colander, 2004, p. 90) Since 2004 the demand for gasoline has been constant and the price of gasoline has continued to rise, causing gasoline expenditures to rise astronomically.
However, given that an acceptable substitute for gasoline does not exist, consumers are unable to cutback on the amount of gasoline being consumed. The article suggests that some reasons for consumers’ inability or unwillingness to cutback on the consumption of gasoline are long commutes, the use of vehicles which are not fuel efficient and a lack of alternative solutions such as carpooling and public transit options. The law of supply also suggests that if a firm cuts back on the amount of a good being supplied, the cost of cutting back outweighs the cost of continuing the supply.
The Law of Demand The examination of the correlation between the price of a good and the law of demand is necessary to predict how market forces react to a reduced supply of goods. Dictionary. com defines price as “the sum or amount of money or its equivalent for which anything is bought, sold, or offered for sale. ” (para. 2) Price is an essential ingredient of the law of demand. The law of demand is “quantity demanded decreases as price increases, all other things being constant” (Colander, 2004, p. 188) The substitution of alternate goods accounts for the law of demand.
As the price of goods such as gasoline increases, people tend to replace it with similar goods which may have a lower price. If a good has many substitute goods, the substitution effect will be strong, and price increases will be relatively small. However, if a good is both necessary and has little or no alternatives, the substitution effect will be small which means the demand will be more constant, and prices could increase. In the case of crude oil, no substitute goods other than coal or solar energy exist.
Since such substitute goods are not largely interchangeable the possibility of a sharp increase in prices is a reality. The article suggested that the most feasible solution to lessen the demand for gasoline and drive prices lower is to increase the production of more fuel efficient cars such as hybrids. As a result, as gasoline prices continue to increase consumers will purchase more hybrids and compact cars as opposed to trucks and sports utility vehicles. The article also suggests that the increase in the price of crude oil is also largely due to the dependence that the United States has on foreign countries for oil.
Since the United States consumes more than 25% of the world’s petroleum products yet the country produces only 3% of such reserves, the obvious assumption is that the United States relies heavily on imported petroleum products. “Gasoline accounts for 40% of all petroleum products supplied to U. S. consumers. ” (Cooper, 2008, p. 8) Such demand the demand for petroleum products to more than double. Conclusion In conclusion, the article provided an excellent means of understanding the role that supply and demand plays on pricing in the crude oil market.
As the demand for oil remains constant the price will continue to rise and as the supply increase the price will also increase. A study by the Congressional Budget Office Supply found that as the price of gasoline increases consumer behavior changes. The study found that consumers “use less gasoline, drive slower, drive less, use public transit, and purchase more fuel efficient cars. ” (Cooper, 2008, p. 12) However, with such changes in consumer behavior, the change in consumption has been modest.
Therefore prices of fuel should remain steady or even increase in the upcoming years. References Colander, David C. (2004). Economics (5th ed. ). New York: McGraw-Hill/Irwin. Cooper Mark, (2008). Ending America’s oil addiction: a quarterly report on consumption, prices and imports first quarter 2008. CFA Consumer Federation of America. Retrieved August 2, 2008, from http://www. consumerfed. org/pdfs/First_Quarterly_Gas_Report_2008. pdf Dictionary. com. (2008). Definition of price. Retrieved August 2, 2008, from http://dictionary. reference. com/browse/price