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More Oil Dilemmas

Jun 27, 2011 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment, International Trade and Finance • 227 Views    No Comments

The recent International Energy Agency (IEA) announcement is about a lot more than a tank of gas. Everyday, for 30 days, 2 million barrels of oil will be released from strategic petroleum reserves (SPRs). The U.S. will be responsible for half of the 60 million barrel total while other IEA member nations will provide the rest.

In addition to gasoline, toothpaste, food preservatives, vanilla ice cream with artificial flavoring, rose-scented perfume, plastic bags, Excedrin and golf balls all contain petrochemicals.

That means not only might gas prices drop but also golf balls could be cheaper.

The Economic Lesson

Sometimes policy decisions have unintended consequences. Better unemployment insurance can lead to more unemployment. Seat belts can encourage unsafe driving. Diet snacks could make us fatter. And, will having more oil mean we will consume even more oil and soon return to higher prices?

When price goes up, we have to sacrifice more for every barrel that we consume. Then, substitutes become increasingly attractive. (You might want to look at this pistachios econlife post.)

Will attractive oil substitutes have a more long-lasting impact on oil prices?

An Economic Question: How might you illustrate the IEA decision on a supply and demand graph?

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