OPEC Price Increase
OPEC recently decided to reduce its production in order to raise world
oil prices. Here are some rough characteristics of the current US oil
market:
- US consumption of crude oil is 19 million barrels (bbl) per day.
- US production of oil is 8 million bbl per day.
- The world price of oil is $15 per bbl.
- US demand for oil has an elasticity of -0.1
- US production of oil has an elasticity of 0.1
- The supply of imported oil is perfectly elastic.
What would be the effects of OPEC successfully raising the
world price of oil to $30 per barrel? You may assume that the supply of
imports remains perfectly elastic after the price change (that is, the
supply of imports shifts up but remains flat).
Resources
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Solution
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 10/08/2005
