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Using the supply-and-demand model, how would Pickens' plan affect the global price of...

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sj83 | Valedictorian

Posted April 16, 2013 at 1:19 AM via web

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Using the supply-and-demand model, how would Pickens' plan affect the global price of oil if it were to be successfully implemented?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 16, 2013 at 1:36 AM (Answer #1)

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If the plan that T. Boone Pickens promotes were to be fully implemented, the global price of oil would decrease.  It would decrease because Pickens’ plan would reduce the demand for oil.  When the demand for a product goes down, its price will, all other things being equal, go down as well.

Pickens’ plan would reduce demand for oil in two ways.  First, it would increase the supply of competing goods such as natural gas and renewable energy sources.  If the supply of these goods goes up, their price goes down.  If the price of a good that competes with oil goes down, the demand for oil goes down as people stop buying oil and buy the competing good instead.  Second, it would reduce the need for oil by reducing the amount of electricity that is needed.  As people did things like insulating their homes better, the demand for electricity would drop.  Since oil is used to produce electricity, the demand for it would drop as well.

Thus, Pickens’ plan would cause the demand for oil to drop.  When demand drops, prices drop too. 

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