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  • Essay / Rising Oil Prices - 922

    The price of oil aims to unleash chaos in the global economy. This spark recently occurred in the Middle East. In recent history, the spark came from "the Arab oil embargo of 1973, the Iranian revolution of 1978-1979 and Saddam Hussein's invasion of Kuwait in 1990..." (Economist). “The Middle East and North Africa produce more than a third of the world’s oil.” (Economist). The situation in Libya is worsening, reducing the country's oil production by half. The unrest is spreading across the region, threatening to cause wider disruption. The price of Brent crude jumped 15%, reaching $120 per barrel on February 24. (Economist). Supply disruptions lead to higher oil prices and could increase inflation. The lasting effects could lead to an increased need for petroleum substitutes. The companies that manage the oil sector are oligopolies. Oligopolistic firms are few in number, but generally large, and control the industry. They intend to have strong pricing power and erect a difficult barrier against new entrants. For oligopolistic oil companies, business is doing very well because in the 20th century and so far in the 21st century, the world runs on oil thanks to a very strong dependence, almost without any effective substitute. Oligopolistic companies in this industry almost never have to worry about potential entry, as it is estimated that starting an oil company cost around $50,000 in the 19th century, but today in the 21st century it will take millions of dollars. Consumers and businesses have an almost unwavering dependence on oil for their needs. Demand is inelastic. Oil prices can rise or fall slightly and no one will really notice the difference between demand gains and losses. Again, demand is inelastic because the middle of the paper is shutting down. In the long term, regarding the Libyan crisis, it is expected that substitutes for oil will become more and more numerous. consumer preferences. Oil companies could see this as a threat to their oligopolistic activities. They may have to take greater responsibility for keeping prices as low as possible to prolong the rise of efficient and effective substitutes for oil. Companies may realize that oil increases suggest that they need to create a subdivision within their companies (much like Scion under Toyota cars) in an effort to develop substitutes to make their companies safer on the financial plan. "Oil and the economy: the oil shock of 2011 | The Economist." The Economist - Global news, politics, economics, business and finance. Economist.com, March 3, 2011. Web. March 11. 2011..