Question

The price of oil is a very important and volatile resource in our economy. Oil has many different functions that are either used as a final or intermediate good for our economic functioning. How do you think the United States should deal with the vulnerability of importing oil? What impact does OPEC have on the price of oil when the US, one of the largest importers of oil, is experiencing either a recession or economic growth? Why would a recession make the cartel more vulnerable to price cutting? In your answer, make sure to discuss how the control of OPEC will allow more alternative energy sources to be researched and what impact this has on the governments’ role. Respond to at least two of your fellow students' postings.

Answer 1

Vulnerability of Importing Oil - To mitigate the risks involved in importing oil US has to reduce its dependency on importing oil and should take up the following measures :-

1. Fund Research and Development projects for finding economical techniques of oil extraction within US, where presently in US extraction is not done due to uneconomical consquences.
2. Promote industries to go for more renewable source of energy production by giving incentives, tax benefits, ease of starting business opportunities in sectors like Wind, Solar, Tidal, BIO fuels etc.
3. Implement policies on existing consumers and manufacturing/production organisations to reduce oil related products consumption in their processes, optimize efficiency and include alternate energy sources as complementary fuel, deploying utilities and commodities consuming less energy, efficient engines, hybrid engines etc.

OPEC's impact on OIL Price in conjunction with US Economy status - Oil market is controlled by limited no of suppliers amongst which OPEC manipulates oil price based on supply and demand in global economy. Unlike a decade ago, when world was much polarised, consumer countries were handful, in contemporary world, the polarity has drifted and price elasticity in demand and supply has got multiple triggers. In today's world even if not insignificant, but, US is not the largest importing country anymore, price of oil will still dip in case of US recession and increase in case of US economic growth due to the corresponding dip in supply and et. al. During a recession, significant production quantity by OPEC countries will have less demand. Hence, to reduce stock, OPEC has to cut prices for countries to procure oil even when not required, just to take advantage of the low price opportunity.