The raising of oil price in America

The article posted by the famous magazine which is Economist, (http://www.economist.com/blogs/freeexchange/2012/02/oil), discussed about the raises of oil price affected by either the low production of oil or sudden growth of global demand for oil in America. The raises of oil price also positively affect the firms’ quantity of labour demanded in the market. The increases of oil price will increases the burden of American’s citizen income.

The first factor that increases the price of oil is the high population in America. Nowadays, the quantity demanded for oil increase because of the global population is increasing. The high population led to high global demand for oil and result in the raises in oil price. This will shift the oil demand curve in the market. From the figure 1, the equilibrium price is $100 per barrel as well as equilibrium quantity of oil demanded is 18 million barrels per day. When the population in American increase, the demand curve shifts rightward, while supply curve do not changes. The D* is the new demand curve in the market. The shift of demand curve to the right shows the increase in quantity demanded for oil from 18 to 19 million barrels per day. This also increases the price of oil from $ 100 to $120 per barrel due to an old equilibrium oil price shifts upward. Therefore, the population increase shift the demand curve to the right results in the increasing of the quantity of oil demanded as well as the raises in oil price.

The second factor that affects to price of oil is the state of nature. Bad and dry weather causes the run dry of oil pipes in American. This result in the supply of oil decreases. Since the low production of oil is occurred, the price of oil tends to increase. In the law of change in supply, the supply of oil decrease will increase the oil price. Meanwhile, the quantity of oil supplied decreases in the market. From the figure 2 is showing that the supply of oil curve will shift leftward because of the run dry of oil pipes. Normally, the market equilibrium oil price is lies in $100 per barrel with the equilibrium quantity of 30 thousand barrels per day. After the oil is running dry in the oil pipes, the supply curve shift to the left because the natural event decrease the oil production. Meanwhile, the new supply curve, S*, causes the quantity of oil supplied decrease from 30 to 25 thousand barrels per day. Supply curve shifts leftward along the demand curve causes the new equilibrium oil price increase from $100 to $120 per barrel. Demand curve will not change in this event. Hence, the supply of oil decreases due to the natural event decrease the production of oil as well as increase the price of oil eventually.

In addition, the raise of oil price will not affect much on the quantity demand for oil. According to the law of elasticity of demand, quantity of oil demanded slightly decreases or increases, when the price rises or falls due to the oil is a natural item. Therefore, the oil demand curve is a highly inelastic demand but not perfectly. From the figure 3 demonstrates that the oil price raises up to $120 per barrel, but the quantity demand just only drop by 1 thousand from 26 to 25 thousand barrel per day.  Therefore, this graph shows the highly inelastic demand for oil but not perfectly.

On the other hand, the raising of oil price is affecting the firm’s quantity demand for labor in the market. The factor that increases the firms’ quantity demand for labor is the price of the firms’ output increases. In other words, the raise of oil price is the reason that firms increase their quantity of labor demanded. This is because the raise of oil price increases the value of marginal product of labor. For instances at the beginning, a firm has 1 worker to produce 5 barrel of oil per day. If the firm hires the second worker to produce 10 barrel of oil, thereby the marginal produce of that worker is 5 barrel of oil. If the price of oil is $100 per barrel, the value of marginal product is $500 which is $100 times 5 barrel of marginal oil. Meanwhile, if the wage rate is $20 per day, the firm earns the profit of $480 from the second worker.

In this case, when the oil price raise up to $120 per barrel, the value of marginal product of the second worker is $600 ($120 times 5 barrel of marginal oil). Therefore, the firm gains the extra profit of $580 which computed by the value of marginal product of second worker ($600) minus the wage rate of $20 per day for the second worker. When the firm earned extra profit, it intends to hire additional labor to produce additional produce. This brings the profit to that firm when the additional products is produced and sell it with higher price.

            I believe that the raising of the oil price brings benefit to those who are facing unemployment. The firms are willing to hire additional labor to produce additional products in order to gain extra profit. The extra profits reduce the total cost of the firms; thereby it is deserve to employ more workers in the production. Therefore, the increasing of oil price result in the reducing in unemployment as well as suppliers can earn the considerable profits.