How Libya Protests May Affect Oil Prices

Middle-East Tension Influences Markets

The price of oil has again hit $100 a barrel.

It’s a two-year high, affected by antigovernment protests in Organization of the Petroleum Exporting Countries (OPEC). Following similar protests in Egypt, the majority of news is coming from Libya, where 80 percent of the economy depends on oil exports.

Short and Long Run of It

But the current fear in OPEC, with conflicting signals from Barack Obama, doesn’t necessarily mean that oil prices will remain high. Because price elasticity can differ in the short run and the long run, as explained by a former Chairman of the President’s Council of Economic Advisers.

In the short run, both the supply and demand for oil are relatively inelastic. Supply is inelastic because the quantity of known oil reserves and the capacity for oil extraction cannot be changed quickly. Demand is inelastic because buying habits do not respond immediately to changes in price.

The situation is very different in the long run. Over long periods of time, producers of oil outside of OPEC respond to high prices by increasing oil exploration and by building new extraction capacity. Consumers respond with greater conservation.

Animal Spirits Need Comfort

Barack Obama seemed eager to get rid of Egypt’s president, who provided citizens with more human rights than the terrorist leader in Libya. Protests against Libya’s leader – able to upset the price of oil so dramatically in America – are more evidence of Barack Obama’s failure handling America’s economy.

The struggling economy needs a volunteer in the Oval Office with the competence and character to help Americans succeed.

References

N. Gregory Mankiw, Principles of Economics (Ft. Worth: Dryden Press, 1997).

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