Economics 201 Writing Assignment 19 September 1999
Heating Bills Expected to Rise
This article, from the September 7, 1999 edition of the Wall Street Journal Interactive Edition discusses the potential increase in home heating costs this winter due to numerous factors.
The main focus of the article is the increase in natural gas and crude-oil prices over the last year. At this time last year, consumers enjoyed “record-low crude-oil prices.” This year, however, the prices are higher, which is principally due to the decision of OPEC (Organization of Petroleum Exporting Countries) to force the price of oil to rise. In order to raise prices, OPEC had to make a conscious decision to cut back on production. Since OPEC is the principal oil source for much of the world, their decision to reduce supply and increase cost greatly affected the supply curve for the entire oil industry. It forced the supply curve for oil products to shift to the left, which caused movement of the equilibrium price along the demand curve. This shift in equilibrium means that consumers will now be forced to pay a higher price if they want to continue the use of oil and natural gas.
This issue of changing oil prices has implications in a number of Mankiw’s economic principles. First, it will force consumers to make a trade off. Home heating in the winter is a priority for most people. There will have to be a trade off between home heating and the consumption of luxuries. Common winter activities such as skiing and travel, as well as holiday gift sales will likely decrease due to the increase in the cost of fuel for home heating. It is also likely that there will be a trend to move away from oil and natural gas in the home heating industry. Products like wood stoves and electric heaters may see an increase in sales, as they are a substitute for petroleum-based home heating.
The principle that the market is generally the best way to determine price and production is also an issue here. OPEC is operating in a somewhat monopolistic manner by trying to increase their profits from oil exports. If they allowed the market to determine price and production, oil prices would stay at a reasonable level and everyone would be better off because of the fair trade between the petroleum exporting countries and the countries that rely on those exports.
Another issue discussed in the article is the change in demand that is likely to occur this winter. After several mild winters, this winter is likely to be “average.” This will cause the demand for home heating oil and natural gas to be greater than it has been for the last several years. Another non-price determinant of demand will also be at work in forcing natural gas and oil prices up: Y2K. Paranoia about computer shutdowns and power failures as the year changes to 2000 has changed expectations for many consumers. They will stock up on oil and gas in 1999, as they expect that there could be shortages and other problems in 2000. Together, these two factors will shift the demand curve for oil and natural gas to the right. Coupled with the shift in the supply curve caused by OPEC’s reduced production, this increase in demand could force oil prices to the highest level in recent memory.