Question

In April 2020, international oil prices fell down drastically, due to two major reasons, including the oil supply war going on between Saudi Arabia and Russia as well as the Covid-19-driven global crisis. Imagine a standard supply-demand model for the international price of oil. Which of the two curves (supply and/or demand) in your model need to shift in order to explain the observed drastic reduction in the oil prices due to the two above events? In which direction do they shift?

a. The supply curve shifts to the left and the demand curve shifts to the right.

b. The supply curve shifts to the left and the demand curve shifts to the left.

c. The supply curve shifts to the right and the demand curve shifts to the right.

d. The supply curve shifts to the right and the demand curve shifts to the left.

e. Only the supply curve shifts to the right.

f. Only the demand curve shifts to the left

Answer 1

Option d is correct

Due to reduction in global demand the demand curve must be shifting to the left. Due to oil supply war, none of the suppliers are going to reduce supply and this implies that increased production will shift the supply curve to the right. As a result the price will decline both from the demand side and the supply side.