[CarlosFerreira]

I got an assignment to do for an Basic Economics module: to use economics theory to study the price of a commodity. The teacher's idea was that everyone should apply the very basic tools we've been learning to a real problem, and see how it went.

The limit was 1000 words.

It was submitted on the 28th November 2008. Some of the references in the work were taken from PeakOil.com, so I suppose it's only fair I share this with all of you.

Feel free to comment. I will post the evaluation and comments the teacher makes when these are available.

Also, if by any chance any of you wants, feel free to quote it on your own assignments. However, don't ever plagiarise, please. That's a crime and, more importantly, a great annoyance.

Cheers all,

Link for Assignment

[vtsnowedin]

page 3 paragraph 2 second sentence, either add the word oil or remove the word of.
I would take a long hard look at the work of Cooper you cite. Is demand really that inelastic? Also your discussion does not consider the availability of substitutes for oil. At what point dose a consumer of oil switch to substitutes that are known and begin to invest in the development of new substitutes?

[CarlosFerreira]

8) page 3 paragraph 2 second sentence, either add the word oil or remove the word of.

Oooooops...

I would take a long hard look at the work of Cooper you cite. Is demand really that inelastic? Also your discussion does not consider the availability of substitutes for oil. At what point dose a consumer of oil switch to substitutes that are known and begin to invest in the development of new substitutes?

My work was 2030 words long (remember, the limit was 1000) when I finished. I analysed 4 extra themes apart from those you see there:
- elasticity of demand may be different (long run, no constraints; people invest in capital equipment, like cars, than run on different sources of energy);
- The part of the price of oil that effectively impacts on fuel prices, and how it increases with the increase in cost of crude oil (48% average in the period from 2000 to 2007; 58% average in 2007) and how this could help the mentioned price elasticity of demand increase, by increasing the input elasticity of demand - oil is a product for the oil industry and an input for everyone else;
- The investment in alternatives effectively creates a substitution effect; I was going to create a new version on the price equation, accounting for this impact - investment in alternatives over time diminishes the shadow price of oil and diminishes the demand; so it could, after some point, contribute to diminishing the price of oil
- The impact of cartel behaviour - OPEC will rule the market as production from non-OPEC decreases and demand increase, ceteris paribus

Unfortunately, I ran out of words to say it all. I'm considering expanding it, depending on the teacher's input.

But thanks for the comments, it's great that people around here have that wholesome view of the problem; try discussing this in a pub with buddies and they'll thing the beer is going to your head.

[vtsnowedin]

Ah the 1000 word limit.. You should not let a word limit lead you to a wrong conclusion. Where you do not have the space to give a detailed discription of a process or factor you should just name the factor etc. and use it correctly leaving the reader to want to explore the issue more completely. Good luck with your studies.

[CarlosFerreira]

Right. I did believe it stopped me from presenting the most important bit: oil prices, in the long run, will come down because, as an input, oil will be substituted. I wanted to take it that way, the teacher just said I was overdoing it. It's a small assignment, supposed to be worth just 20% of the final score for an Introduction to Economics module.

He also said I could go on with it in the future. That's why I wanted some input, any further ideas will be very useful.

[shortonsense]

Right. I did believe it stopped me from presenting the most important bit: oil prices, in the long run, will come down because, as an input, oil will be substituted.

Good call. That was my first thought, you had no allowance for demand reduction because of high prices, which entails allowing for substitution.

Maybe multiple components, showing the differences between how price drops because the major component ( transporation ) can easily use less through time, particularly because of increased price? In other words...poor elasticity up to a point, then an inflection because of the sudden elasticity?

Other components, jet fuel, road building, chemical feedstock uses, are less sensitive to price and therefore will consume a larger percentage of the supply through time as transport shifts away?

He also said I could go on with it in the future. That's why I wanted some input, any further ideas will be very useful.

Fields don't produce like bell shaped curves, so I'd pull that example and go find some real ones. TOD has an occasional representation which works better, take a bell shaped curve, lop the top off to make it flat, stretch it, and then stretch the right hand tail into a long, tapered decline rather than just the flipside to the increasing production portion. More representative at the theoretical level hands down. Search on WebHubbleTelescope, he does a good job of showing that one correctly.

[CarlosFerreira]

Thank you for your comments and ideas; I'll probably take it that way.

Cheers!