(3) The US produces about 12 million barrels of oil per day and consumes about 22...

(3) The US produces about 12 million barrels of oil per day and consumes about 22 million barrels per day (mbpd). Global production and consumption are about 100 mbpd. About 0.75 mpbd come from federal land, and about 1.75 mbpd come from federal waters (primarily the Gulf of Mexico). The current oil price is about $50, the elasticity of oil supply is 0.1 and the elasticity of oil demand is -0.2.

a. Using these numbers, calculate the long-term effect on prices and quantities of banning drilling on federal land.

b. Using these numbers, calculate the long-term effect on prices and quantities of banning drilling on federal land and federal waters.

Solutions

Expert Solution

We derive the slopss of global demand and supply curve at equilibrium point from the elasticity conditions. If drilling is banned at the given places then supply falls by the amount the respective places produce at the equilibrium price. Since the fall in supply is very small, we can take slopes to remain constant in the small neighborhood. Then we solve for the price rise and fall in quantity.

Rahul Sunny answered 3 months ago

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