Answer to Question #50872 in Macroeconomics for Mary

Question

Since Fall of 2013, the price of oil has shown a steady decline as continued increase of global oil production that has far exceeded the rising demand for oil. Accordingly, many analysts in the energy field have had predicted the likelihood of further decline in oil price in the US market as the US continues to expand its domestic oil production with a long term objective of becoming even net exporter of oil by Y2030. Given the significant trend of declining oil price and expected independence of oil production by US in coming decade, draw an AS/AD diagram of macroeconomics model (not oil market), explaining the effect on the US macro-economy of expected decline in oil price in 2014 and beyond. In your explanation in words with the help of the diagram, you must clearly explain the connection between changes in oil price and the fluctuations in macroeconomic fundamentals in the US economy. Then show the impact of continuos fall in oil price on the U.S. economy by using ad-as model during the recovery period 08

Answer 1

The U.S. domestic crude oil production level has increased continuously since 2008, exceeded U.S. net imports in 2011, and continues to grow at historic rates currently. Reduced crude oil imports have substantially increased U.S. Energy Security by reducing the level of imported energy supplies from higher disruption risk Countries outside of North America.
Besides the development of new and innovative shale or tight oil production technologies a major enabler to increased domestic U.S. crude oil production has been increased market prices and access to State and Private shale oil reserves. The major potential risk to further tight oil development could be a large and long-term decline in crude oil market prices. This risk to U.S. domestic oil production is quite real and could be the result of market conditions that shutdown previous shale oil development and production projects during the early 1980’s.
So, at first, the decrease in oil prices will cause both aggregate demand and aggregate supply shift to the right, increasing the real GDP. But when the price will be too low, a lot of oil production projects will shit down, causing the aggregate supply and demand shift to the left in some moment.