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The article, Oil Prices Rise with Gasoline, Diesel, by Timothy Puko and Nicole

Friedman provides several good examples of the market forces of supply and demand along with

some other principles of economics, all of which are essential points in the class.

To begin with, the first case in the article shows the relationship between supply and

price. Since Colonial Pipeline, estimated to deliver about 40% of the gasoline consumed on the

East Coast, had partially closed the major artery, gasoline made obvious daily gains. In other

words, the decrease in supply of gasoline resulted in its rising price. Does such situation appear

accidentally? No, of course not. The economics principle of the relationship between supply and

price is clearly showed in the figure below:

S2
Price of gasoline
New S1
equilibrium

P2
P1 Initial equilibrium

Demand

Q2 Q1 Quantity of gasoline

The pipeline outage reduces the quantity of gasoline able to be delivered, thus shifting the

supply curve to the left. The supply curve shifts from S1 to S2, which causes the equilibrium price

of gasoline to rise from P1 to P2 and the equilibrium quantity to fall from Q 1 to Q2. Now we can

safely predict that the price of gasoline will fall when Colonial Pipeline reopens next week

(supposing all other factors do not change).

Second, the article states that oil has benefited from much larger gains in refined products

such as gasoline, which gained more than 5% in one day. In this case, since no evidence indicates

that the supply of oil decline, why is the price of oil influenced by the price of gasoline? To
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answer this question, we should think carefully about the relationship between oil and gasoline.

In fact, gasoline is a fuel derivative of oil, that is, we cannot produce gasoline without oil.

According to the principle that people respond to incentives, when the price of gasoline rises,

producers tend to produce more gasoline in order to make more money. Therefore, the demand of

oil increases, which causes a rise in oil price. More details of the relationship between demand

and price are shown in the figure below:

Price of oil
Supply
P2 New equilibrium

Initial
P1 equilibrium
D2

D1

Q1 Q2 Quantity of oil

Just as we have learned, an event that raises quantity demanded at any given price shifts

the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here

a higher price of gasoline push producers to demand more oil. The demand curve shifts from D 1

to D2, causing the equilibrium price to rise from P 1 to P2 and the equilibrium quantity to rise from

Q1 to Q2. Similarly, the price of oil is influenced by the price of other refined products, which

have also gained a lot recently.

Finally, the higher price in the oil market provides an incentive for Nigeria and Libya to
ramp up oil exports. Libya is also planning to resume exports from its Ras Lanuf port and a
tanker is now due to be loaded with 600,000 barrels of crude. Making such decisions requires
Nigeria and Libya to trade off the goal of selling more oil to foreign countries against a higher
cost. In the end, both countries chose to increase oil exports. In this way, the price of oil would
start to drop. Let us have a deeper look of such change in the figure below:

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S1
Price of oil Initial S2
equilibrium

P1
P2 New equilibrium

Q1 Q2 Quantity of oil

The rise in oil exports increases the quantity of oil supplied, shifting the supply curve to

the right. The supply curve shifts from S 1 to S2, which causes the equilibrium price of gasoline to

decrease from P1 to P2 and the equilibrium quantity to grow from Q 1 to Q2. In conclusion, an

event that increases quantity of supply at any given price shifts the supply curve to the right. The

equilibrium price falls, and the equilibrium quantity rises.