Question

Discuss some of the following:

What are the costs and benefits to an oil company when it comes to drilling for oil? What are the opportunity costs to the company when drilling for oil? What are the costs and benefits to society of lower or higher prices of oil? What is the opportunity cost to society of tighter environmental restrictions on the production of oil? How and why does the price of oil change over time? Why does it tend to be quite volatile?

Answer 1

The activities relating to drilling of oil is considered as the one among the important factors which affects the economy of the federal government. It reduces the cost of expenditure incurred on producing oil from sea sources and also reduces the price of the oil in the domestic level. In the view point of concept of costs and benefits, the facts reveals that the oil company Deepwater Horizon's quantity rate of supply of drilled oil was increased to 8.5% to 10% recently. It is evidently prooved that the uses of domestic source will extent up to 20 years. The cost of drilling the oil rose to very high rate due to its prevailing situation of extracting in the surface land instead of importing oil from other countries. Due to heavy production cost, profit margin also reduced slightly, But when it is correlated with the benefits, oil drilling method reduced the air pollution and other congested related mass pollution.

On-shore drilling related to the drilling of oil towards surface of the earth, while off-shore drilling refers to drilling beyond the sea-bed of the earth. Considering the practical difficulties of the cost, we can evidently proove that on-shore drilling is an economical one and is considered as the best alternative of opportunity cost of oil drilling. It has dual benefits - 1) it reduces the cost of extraction and 2) saves the oil extraction - project time.

Factors like inflationary pressures, less amount of production rate, Inappropriate proportion of demand and the supply, the price of oil increases at very high level. This affects the cost of production of the oil extration at all level and commercial economic zones in the US. Low price of oil benefits the economy by reduction in cost of transportation of goods and services, reduction in the price of transport services availing by the people and the price of the commodities used by all the people also reduces to considerable effect. Commerical and business ventures will increase the price level of the goods, when the cost of oil increases. For example, price of cabs, airline tickets and other source of shipments activities will increase. Thus extreme and less extreme level of increase and decrease in price level of oil will have keen effect on economy.

Bureau of Safety and Environment Enforcement (BSEE) and Environment Protection Agency (EPA) framed many tight policies for the oil extracting companies which are working actively in US. Oil drilling beyond the sea-bed of the earth will pose the environmental threat for the useful aquatic resources in the sea level. But in contrary, oil drilling companies which penetrates deeply in to earth surface will pose less threat of environmental pollution, And also oil drilling towards earth surface is least expensive leads to selecting oppourtunity cost for the oil extraction.

Ineffective supply and demand of the oil products, political instability, unfavorable policies of the government, global warming conditions are considered as the main factors which makes the oil prices changing from time to time. It is volatile in nature due to situation of fluctuating world market cycle of fixing the oil prices accordingly. Now one barrel for the oil price was fixed at $75 due to world market cycle of price variation among all the oil producing countries.