As a result of increased tensions in the Middle East oil pro

As a result of increased tensions in the Middle East, oil production is down by 1.21 million barrels per day – a 5 percent reduction in the world’s supply of crude oil.  Explain the likely impact of this event on the market for gasoline. How will the public transit be impacted? How will the market for tires be impacted? How will the market for large SUVs be impacted? ?

Solution

The market for gasoline depends on demand and supply of crude oil. when demand increases gasoline price also increases if supply remains fixed or reduction in supply. Here given that oil production is down by approx. 5%. so due to a reduction in the supply of oil, the supply curve shifts leftward and price of gasoline increases in the short run but in long run, it depends on situation and development of technology. If some technology developed which runs on electricity and some other form of energy then demanded oil decreases.

Todays all transit runs on gasoline, so a reduction in oil production affects badly public transit. And public transit runs lower in number and. suppose initially 1000 buses run in a city then after reduction in production of oil, a government may reduce the number of buses to 800.

Demand for tire will be lower because of increase in the price of gasoline and Demand for SUVs also decreases. So, the price of tire and SUVs decreases in short run.