Question

In: Economics

Please read the Bloomberg article below, and use the information in the article to answer this...

Please read the Bloomberg article below, and use the information in the article to answer this question.

U.S. Gasoline Use Rising to Record This Summer on Low Prices
by Mark Shenk

U.S. Gasoline Use Rising to Record This Summer on Low Prices

by
Mark Shenk

June 7, 2016, 12:23 PM EDTJune 8, 2016, 12:01 AM EDT

  • Gasoline consumption to average 9.5 million barrels a day: EIA
  • WTI crude seen averaging $42.83/bbl in 2016, $51.82 in 2017

Oil Producers Respond to Meet Demand on Prices Gain

U.S. gasoline consumption is set to climb to a record this summer as the lowest pump prices in more than a decade encourage Americans to take to the roads.

Demand, which typically peaks between the Memorial Day holiday in late May and Labor Day in early September, will average a record 9.5 million barrels during the second and third quarters, up from 9.48 million forecast in May, the Energy Information Administration said in its monthly Short-Term Energy Outlook released Tuesday.

The average retail price for regular-grade gasoline this summer is forecast at $2.27 per gallon, more than the $2.21 estimated in May but down from $2.63 during the 2015 summer driving season.

"Even with higher crude oil prices passed on to consumers at the pump, summer retail gasoline prices are still expected to be the lowest in 12 years," EIA Administrator Adam Sieminski said in an e-mailed statement. "Despite the recent rise in gasoline prices, summer gasoline demand is forecast to reach a record 9.5 million barrels per day."

While crude prices in New York have jumped 90 percent from a 12-year low earlier this year as traders estimate the market is coming into balance, the commodity is still worth less than half its peak in mid-2014. The EIA raised its crude price forecasts as falling U.S. output and unplanned disruptions elsewhere limit supply while demand grows.

Production Decline

"Low oil prices continue to cut into domestic oil production, with U.S. monthly oil output not expected to start steadily increasing until the end of 2017,” Sieminski said. "The decline in U.S. May oil production is expected to be the largest drop in monthly output since Hurricane Ike knocked out a big chunk of offshore oil production in September 2008."

U.S. production is expected to drop from 9.43 million barrels a day in 2015 to 8.6 million this year and 8.19 million in 2017, the agency said. U.S. production estimates were unchanged from last month’s report.

Global oil demand will be 95.26 million barrels a day this year, compared to 95.24 million in May’s outlook. World consumption will be up 1.5 percent from 93.81 million barrels in 2015.

West Texas Intermediate crude, the U.S. benchmark, will average $42.83 a barrel in 2016 versus the May projection of $40.32, according to the report. Prices will average $51.82 next year, up from the previous forecast of $50.65. WTI touched $26.05 a barrel on Feb. 11, the lowest since 2003, and is now hovering around $50.

Brent crude, the benchmark for more than half the world’s oil, is projected to average $43.03 this year, up from the prior estimate of $40.52. Prices will average $51.82 in 2017, up from the May estimate of $50.65, the agency said.

1. In the U.S. market for oil, the price of West Texas Intermediate (WTI) crude oil can be considered the equilibrium price of crude oil in the United States. The price of WTI will average $42.83 in 2016, while the price in 2017 will average $ ______ the article considers 2017 to be "next year"). Give your answer to two decimals.

The article mentions that U.S. oil production is 8.6 million barrels a day in 2016 (2016 is considered to be "this year" in the article) and will change to _________    million barrels a day in 2017. Give your answer to two decimals.



2. Assume that these prices and quantities represent the equilibrium outcomes of the U.S. oil market when the demand curve and the supply curve in this industry intersect. Given the change from 2016 to 2017 in the price of oil and the change in the quantity of oil sold, identify what caused these changes. To do this, suppose that as we move from 2016 to 2017, only one curve shifted—either the demand curve or the supply curve.



Which one of the following shifts explains the changes in the equilibrium price and quantity of oil sold as we move from 2016 to 2017?

Choose one:

A. a leftward shift in supply

B. a rightward shift in demand

C. a leftward shift in demand

D. a rightward shift in supply

Please in the blank for the paragraph and question 2, please find the correct answer?

thank you.

Solutions

Expert Solution

1)

#In the US market for oil, the price of WTI crude oil can be considered the Equilibrium price of crude oil in the US .The price of WTI will average $ 42•83 in 2016, while the price in 2017 will average $51•82

Evidence for Article-----

prices will Average $51•82 in 2017 up from the May estimate of $50•65 , the agency said.

#;The article mentions that US oil production is 8•6 million barrels a day in 2016 and will change to 8•19 million barrels a day in 2017

Evidence from article----

US Production is expected to drop from 9•43 millions barrels a day in 2015 to 8•6 million this year and 8•14 millions in 2017, the agency said

2) Which one of following shifts ,explain the changes in equlibrium price and quantity of oil sold as we move from 2016 to 2017--------:

Ans-- option B

rightward shift of demand curve

Explanation-----

I will give to graphic explanation---+

, Rightward shift of demand curve leads to form new equilibrium point E' and determines Equilibrium Quantity Q' , Equilibrium price= $ 51•82 rises from , $42•83 per barrel.

Thanks


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