Question

By mid-May 2020, in the midst of the COVID-19 Pandemic, gas prices fell to its lowest level since 2016 reaching as low as $1.85 per gallon on average in the U.S.A.

Using your knowledge of factors that impact demand and supply, explain the various ways in which gas prices fell during an international pandemic.

To get the full 3 point extra credit, your discussion must:

• Include a statement on which direction Demand Curve and/or the Supply Curve for gas shifted.
• Include a clear explanation of the relevant factor(s) that caused such shift(s).

Answer 1

Gas prices fell during the international pandemic because the demand curve shifted to the left as there was a sudden drop in demand because of the lockdown measures imposed in several regions of the world. This drastically reduced the demand for oil as travel plunged, trade was curtailed all over the world. Manufacturing and industrial activities plummeted. All these factors led to the leftward shift in the demand curve. And thus reduced the oil prices drastically.

In addition, there was limited storage capacity available to store the oil reserves as the oil which was produced was also largely going unutilized and the excess production did not have any room for storage with costs of storage increasing and the price of the oil declining. This further dampened demand for oil from suppliers of oil. Thus consumers, suppliers and firms all reduced demand for oil.

At the same time the supply curve for gas was increasingly to the right. As supply far exceeded demand in the market, because of the price war between Saudi Arabia and Russia. Thus there was a greater need for the supply curve to shift increasingly to the left, but instead it shifted to the left only slightly after the OPEC meeting as the number of suppliers were far higher, the production levels were high as the availability of workers was greater and the state of the technology was also higher, which increased the production levels of oil.