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THEMES // SUPPLY INELASTICITY // 'ECONOMICS FOR DUMMIES', EXAMPLE: OIL, HUBBERT'S PEAK |
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Enough 'Economics for Dummies'!
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There is NO perfectly inelastic commodity. Until someone figures out a way to monopolize the oxygen market and charge for it,
there never will be.
Several commodities, however, are extremely inelastic.
- Growing global population and increased industrialization have led to demand spikes for many commodities.
- Finite supplies are being depleted at ever-increasing rates.
SO:
- Demand remains constant (if not increased);
- Supply shrinks;
- PRICES RISE.
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Prime Example: Oil
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Black gold, Texas tea. Call it what you will, nothing quite exemplifies the notion of commodity inelasticity the way oil does:
- It's a non-renewable source of energy -we can argue over the exact quantity of proven reserves,
but we must all agree the supply is finite, and so at some point scarcity will no longer be a function of OPEC,
political tension, etc. It will be a consequence of the fact that we will have effectively sucked the planet dry of oil.
- It's a fundamental 'building block' in industrial development.
- Unfortunately, its supply is subject to a phenomenon known as 'Hubbert's Peak'.
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What Is "Hubbert's Peak"?
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- In the 1950s a US Geologist, M. King Hubbert, observed that once you extract half the oil from a
given field, production begins to decline. This became known as "Hubbert's Law."
- Hubbert extrapolated this to the US as a whole, and estimated that oil production in the US
would peak in the early 1970s.
- The following chart shows that Hubbert was correct in predicting the peak.
- This period also marked the first time the US became a net importer of oil.
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