The Situation of BP Oil Spills - Essay Example

? BP Oil Spills Contents Contents 2 Introduction 3 Analysis 4 Conclusion 9 Reference List 10 Introduction The essay will critically analyze an article Gulf News that relates to the situation of BP Oil Spills that is claimed to be the biggest accidental oil spill in the economy in the petroleum industry (Gulf News, 2013). The context of the say will not brief about the facts and features of the article. Rather the researcher would be analyzing the ways in which the circumstances in the real world indirectly indicate the different microeconomic theories. The researcher would refer to three microeconomic aspects that can be focused on the article and show its impact on the real world. The essay is thus a pure amalgamation of economies in the theoretical and empirical perspectives. It is highly rational to study the microeconomic impact of the oil crisis as the wastage of oil thorough a spill would surely decrease its supply in the world market. A fall in the supply of oil would cause its scarcity in the market and thereby increase its prices. A rise in price of oil would directly increase the cost of transportation and hence all the goods and services produced in the economy. The researcher in the context of the essay would be explaining the microeconomic impact of the oil spill in the economy of United States and the rest of the world. Analysis The three microeconomic analyses that can be figured in the context of the essay are: Theory of Supply The theory of supply states that a raise in the selling price of goods and services in the market increases the supply of it, given all the other factors affecting supply remains constant. Figure 1: Supply Curve Price Supply Curve Quantitative Supplied (Authors Creation) The above graph explains a positively sloping supply curve in the market. A shift in the supply curve only occurs when the factors apart from prices changes in the market. An increase in the supply explains an upward shift in the supply curve. Considering the above analysis it is true that the oil spill that had taken place in the market for a period of about 87 days had substantially decreased the supply of oil in the world market along with the market of U.S. A shortage of supply of petroleum in the market would be surely increasing the price of it (Riley, 2012). Figure 2: Shift in Supply Curve Final Supply Curve Price P 2 Initial Supply Curve P1 Quantity Supplied (Source: Authors Creation) The figure 2 above explains the upward shift in supply curve of petroleum in the market. As shown in the above graph the sudden supply shock of oil in the market of petroleum in U.S. would surely cause an upward shift in the supply curve. As stated in the above figure the upward shift in the supply curve would be forcing the supplies supply a lower quantity at a higher price. Thus, given the market demand for petroleum the decreased in supply have indeed increased the price of oil in the market for U.S. from say P1 to P2 (McEachern, 2012). Theory of Demand The low of demand in economics states that the rise in price for a commodity or a service is inversely related to its quantity demanded, assuming that all other factors affecting demand are constant (Ceteris Paribus). When a consumer creates a demand in the market, it is a want that is backed by proper purchasing power. The want has the power to satisfy the utility of the consumers. Figure 3: Demand Curve Price Quantity Demanded (Source: Authors Creation) The figure 3 stated above is of a negatively sloping demand curve. However the degree of responsiveness of the rate of change of quantity demanded with respect to the rate of change of price, depends on the elasticity of demand for a product. It is true the demand price elasticity for petroleum in the market is moderately elastic in nature as petroleum is not a necessity. When, the prices of basic necessities of increases then consumers are forced to pay higher (Ross, 1979). Figure 4: Moderately Elastic Demand Curve (Source: Nechyba, 2011) The above figure 4 is of a moderately elastic demand curve, where the change in the quantity demanded for every change in the price level is a little more. A rise in the price of such products would surely reduce the welfare of the consumers in the market (consumer surplus). Figure 5: Loss of Consumer Surplus D1 S2 P2 S1 P1 D2 (Source: Authors Creation) As states in the above diagram, the sudden supply shock in the oil has created an upward shift in the supply curve from S1 to S2. According to the law of demand the initial impact on the demand due to the rise in the price of oil would generate a shift along the demand curve. The rise in the price of oil would decrease its demand in the market. However, the BP Oil Spill created high level of negative eternities in the market. It causes a lot of degradation to the environment like the marine life. It can be assumed that this might indulge many individuals to use more of renewable sources of energy like electricity and solar energy. In that case the aggregate demand for petroleum would fall in the market causing a leftward shift of the curve from D1 to D2. In such a situation the price of petroleum would be falling in the market below P2 in future. Externalities Externalities takes place when the business of a company is hampered due to the impact of something that has not taken place in the firm but have occurred in the external environment. Figure 6: Negative Externalities (Source: Tucker, 2010) As states in the above graph the environmental degradation cause by the BP Oil Spill had created negative externalities in the petroleum manufacturing firms. As shown in figure 6, the rise in the social marginal cost curve above the private marginal cost, at a given marginal benefit curve had created welfare loss in the economy (Freudenburg and Gramling, 2011). Conclusion In the contemporary world the state of economic growth of a nation largely depends on the supply of petroleum (Abeles, 2001). The adequate supply of petroleum in the industry is very important for the manufacturing segment’s progress in a nation. Thus the current inflation in the oil is largely contributed to the greater disaster BP Oil Spill. The oil spill as not only created inflation in the market bur has also generated negative externalities. The government of the country has imposed heavy penalties on the company due to the inflationary costs in the economy. However, according to the researcher analyzes that in future the market price of oil and other goods can only be control if people start investing in renewable sources of energy (Simon, 2003). Reference List Abeles, T. P., 2001. The Impact of Globalization. On the Horizon, 9(2), pp.2 – 4. Freudenburg, W. R. and Gramling R., 2011. Blowout in the Gulf: The BP Oil Spill Disaster and the Future of Energy in America. Massachusetts: MIT Press. Gulf News, 2013. Oil Giant BP Wins in Settlement Dispute. Gulf News, 3 October. McEachern, W. A., 2012. Economics: A Contemporary Introduction, 10th ed. Connecticut: Cengage Learning. Nechyba, T. J., 2011. Microeconomics: An Intuitive Approach with Calculus. Connecticut: Cengage Learning. Riley, G., 2012. Oligopoly – Non Collusive Behaviour. Tutor2u, 23 September. Ross, S. A., 1979. The Economic Theory of Agency: The Principal's Problem. American Economic Review, 63, pp. 134-139. Simon, Z., 2003. The Double-Edged Sword: The Technological Sublime In American Novels Between 1900 And 1940. Budapest: Akademiai Kiado. Tucker, I. B., 2010. Survey of Economics. Connecticut: Cengage Learning. Read More