Oil Price Hikes

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The price of oil intends to spark the chaos in the world economy. This spark lately has been in Middle East. In recent history, the spark came from, “the Arab oil embargo of 1973, the Iranian revolution in 1978-1979 and Saddam Hussein's invasion of Kuwait in 1990...” (Economist). “The Middle East and North Africa produce more than one-third of the world's oil.” (Economist). The situation in Libya are worsening which causes the oil output of Libya to halves. Unrest across the region are spreading, threatening a wider disruption. The price of Brent crude has jumped 15%, reaching $120 a barrel on February 24th. (Economist). Supply disruptions causes oil price to increase and could increase inflation. The lasting effects may bring stronger needs for oil substitutes .

The firms who run oil business are oligopoly. Oligopoly firms are a few but typically large that controls the industry. They intend to have strong pricing power and put up a difficult barrier against business newcomers. For oil oligopoly firms, business is going very well because in 20th century and so far in 21st century, the world is running on oil thanks to a very strong reliance almost without any successful substitutes. Oligopoly firms in this industry almost never have to worry about potential entrances since it is estimated to set up an oil business cost roughly 50 thousands dollars in the 19th century but now in the 21st century, millions of dollars will be required.

Consumers and businesses have an almost unbreakable reliance on oil for their needs. The demand is inelastic. The prices for oil may slightly increase or decrease and no one will truly notice the difference in gains or losses of demand. Again, the demand is inelastic because th...

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...off to shut down.

In the long run regarding the Libya crisis, it is predicted that the substitutes of oil becomes more and more of preferences by the consumers. The oil firms may recognize this as a threat to their oligopoly businesses. They might take more of burden to keep prices lower as possible to prolong the rise of successful and efficient substitutes over oil. The firms may realize that the occurrences of oil hikes suggest them as a need to create a sub-division inside their firms (akin as Scion under Toyota cars) for a purpose of developing substitutes to make their firms more secure in financial future.

Works Cited

"Oil and the Economy: The 2011 Oil Shock | The Economist." The Economist - World News, Politics, Economics, Business & Finance. Economist.com, 3 Mar. 2011. Web. 11 Mar. 2011..

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