An article in Business Week reported the discovery of a new processing technology that makes it economically feasible to turn natural gas into liquid petroleum that yields superclean gasoline, diesel fuel, or any other product derived from crude oil. This discovery represents 770 billion barrels of oil equivalent, “enough to slake the world’s thirst for oil for 29 years.”
a. Using demand and supply analysis, explain why this new process will not cause a surplus of crude oil. If no surplus is created, then what will be the impact of this process on the market for crude oil?
b. Had this process not been discovered, explain why we still would have had “enough” crude oil to meet the growing worldwide demand for crude oil.
a. To analyze the impact of this new processing technology on the market for crude oil, we can start by understanding the basic principles of demand and supply.
Demand: The quantity of crude oil that consumers are willing and able to purchase at various prices.
Supply: The quantity of crude oil that producers are willing and able to offer for sale at various prices.
With the discovery of this new processing technology, natural gas can be transformed into liquid petroleum, which can then be refined into superclean gasoline, diesel fuel, and other oil-derived products. This means that the supply of these products will increase, as the natural gas can now be used as an alternative source of oil-derived products.
In terms of the market for crude oil, two scenarios can be considered:
1. Surplus of crude oil: If the increased production of superclean gasoline, diesel fuel, and other oil-derived products leads to a decrease in the demand for crude oil, then there might be a surplus in the crude oil market. This surplus occurs when the quantity supplied exceeds the quantity demanded at a given price level. In this case, the surplus would put downward pressure on the price of crude oil, as producers would need to reduce prices to sell the excess supply.
2. No surplus of crude oil: However, if the increased production of superclean gasoline, diesel fuel, and other oil-derived products does not significantly reduce the demand for crude oil, then there won't be a surplus in the market. This means that the quantity of crude oil demanded will remain relatively stable, while the new processing technology will provide an additional source of oil-derived products.
The impact of this new process on the market for crude oil would be largely dependent on the responsiveness of demand for crude oil to the availability of alternative oil-derived products. If the demand for crude oil remains relatively high despite the availability of these new products, the impact on the market for crude oil might be minimal.
b. Even without the discovery of this new processing technology, there would still have been "enough" crude oil to meet the growing worldwide demand. This is due to several reasons:
1. Existing reserves: There are significant reserves of crude oil already available in various regions around the world. These reserves can be extracted and refined to meet the demand for crude oil. Additionally, advancements in extraction technologies, such as hydraulic fracturing (fracking) and deep-sea drilling, allow for the extraction of oil from previously inaccessible reserves.
2. Exploration and discovery: There is ongoing exploration and discovery of new oil reserves. As technology and geological knowledge improve, new oil fields may be discovered, increasing the available supply of crude oil.
3. Demand management: The demand for crude oil can be managed through various means, such as promoting energy efficiency and conservation measures, diversifying energy sources, and investing in renewable energy technologies. These initiatives help reduce the reliance on crude oil and alleviate the pressure on its supply.
Therefore, even without this particular processing technology, the combination of existing reserves, exploration, and demand management strategies would have been sufficient to meet the increasing global demand for crude oil.