Peak Oil Impact: Market Analysis & Alternatives
Practice 2
The Hubbert peak theory suggests global oil production will peak and then decline as rapidly as it grew. The debate centers on whether peak oil will occur, and when, with some predicting it in 2010 and others in 2100. This will have serious consequences for developing countries that rely heavily on cheap and plentiful oil.
Economists argue that shortages will motivate the search for new discoveries, increasing reserves beyond Hubbert’s predictions. Natural gas, another fossil fuel, will likely see a production decline not long after oil.
1. Market Effects of Petroleum and Products
The oil market is an oligopoly with a small number of producing companies relative to demand, leading to significant competition.
Effects on Supply
- A reduced supply curve will increase prices.
- Supply is inelastic, meaning price increases do not significantly increase the amount of oil available, exacerbating the situation.
- Future price expectations will further reduce supply.
Effects on Demand
- Increased prices will decrease demand, shifting the demand curve left to balance the market.
2. Impact on Substitute Goods (Biofuels)
4. Combined Effect of Reduced Oil and Natural Gas Extraction on the Electricity Market
Both oil and natural gas are substitute goods. A large increase in their prices will increase demand for alternative resources, shifting the demand curve to the right and creating a new, higher equilibrium price.
3. Impact on Oil Producer Earnings
Reduced supply shifts the curve left, increasing prices. While the quantity sold decreases, the overall effect is an increase in the incomes of oil producers.
5. Alternatives to Maintain Oil Prices
The solution to raw material shortages is to stimulate technological innovations to avoid reaching the peak:
- Replacing oil with alternative energy fuels.
- Improving efficiency in oil extraction and increasing productivity.
- Improving fuel efficiency.
- Replacing conventional plastics with bioplastics, polymers made from natural raw materials.
These alternatives will result in lower oil demand, decreasing the equilibrium price.