Question

1. How can you explain using the economic tools the shocking drop of the world oil prices?

2. What are your expectations concerning the effect of the drop in oil prices on the following:

• Oil exporting countries.
• Oil importing countries.
• The relative importance of non-oil substitutes.
• The environmental damage (degradation).

Answer 1

Answer A: Market economy runs according to the "invisible hands" concept means equilibrium prices are decided by the "DEMAND AND SUPPLY " concept.

When demand exceeds supply then Prices rise.

When supply exceeds demand then Prices get lower.

Shocking drop of the world oil prices , in recent time of pandemic can be explained as a resultant of almost stopped economic activities across the world hence demand of oil dropped suddenly alot, where as supply of oil can not be reduced due to various geo political reasons .Hence greater supply in comparison to demand leads to shocking drop in oil prices.

Answer 2: Expectations concerning the effect of the drop in oil prices on the :

A)Oil exporting countries: They will face adverse effects of dropped oil prices.Hence face loss in revenue.

B)Oil importing countries: They will be gaining as due yo decreased prices.Countries like India , China which imports almost 80% of oil for consumption, will benefit from dropped prices.

C)The relative importance of non-oil substitutes Like renewable sources of energy solar, wind, biomass will show a dip in their acceptance due to lower oil prices , consumers will prefer them in comparison to renewable sources.

D)The environmental damage (degradation): It will have two effects i.e initially due to loss of revenue, exporting countries will decrease the supply hence the oil exploration which will decrease unnecessary exploitation of natural resources hence less environmental damage.

Later due to less preferences to other sources, suppy will get to increase due to demands hence will lead to more exploitation of natural resources hence more environmental degradation.

Hope it helps!

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