In 2013 China moved ahead of the United States of America (US) to become the biggest importer of oil. The increase in Chinese demand pushed the oil price upward. That dearer oil made production methods used in the US, such as hydraulic fracking, viable and has supplied more oil for US domestic use. US oil firms have bought bigger, costlier capital equipment and are hiring more specialist engineers. The growth of the US oil industry helped bring the country’s unemployment rate down to 6.1% in 2014.
Although China is the largest importer of oil, it is still not the world’s largest consumer. In 2013 the US oil industry produced 10.5 million barrels a day, exported 3.4 million barrels a day and imported 10.9 million barrels a day. These numbers are expected to alter in the future. For instance, in 2013 the US had 250 million vehicles and China had only 100 million. It is predicted that by 2030 China will have 350 million vehicles. If that does happen, China will become more exposed to oil price changes and interruptions to oil supply.
Even though US oil output is rising, its use is falling. More oil is being found in the country and more advanced techniques are being used to extract it. At the same time, fewer young people in the country are learning to drive, vehicle ownership per household is declining and average mileage is dropping. In addition, US cars are becoming more fuel efficient because of tighter fuel economy rules and consumers are moving towards cheaper vehicles.
US consumers are becoming more responsive to oil price changes, but a price rise still causes oil producers’ revenue to rise. Shifts in oil price, oil output and oil consumption also continue to have a major impact on the US economy. For example, the discovery of additional oil in the country usually influences the value of the US dollar.
Changes in consumption and production affect China’s and the US’s current account positions on their balance of payments. At present China has the world’s largest current account surplus while the US has the world’s largest current account deficit. It is worth noting that both countries have been seeking to raise their economic growth rate. The US central bank, the Federal Reserve, has attempted to increase the growth of the country’s output by lowering the rate of interest.
(a)[2]
Using information from the extract, explain whether the US was producing on or within its production possibility curve in 2014.
(b)[2]
Explain whether the extract suggests that the demand for oil in the US is price-elastic or price-inelastic.
(c)[4]
Using information from the extract, explain two economies of scale that US oil companies are gaining.
(d)[3]
Calculate the US’s daily demand for oil in 2013.
(e)[4]
Analyse how the discovery of additional oil in the US would be likely to affect the value of the US dollar.
(f)[5]
Discuss whether a cut in the rate of interest will raise a country’s economic growth rate.
(g)[4]
Using information from the extract, explain why the price of oil may rise more in China than in the US in the future.
(h)[6]
Discuss whether a government should try to cut a surplus on the current account of its country’s balance of payments.
Worked solution & mark scheme
This 30-mark question has a full step-by-step worked solution and mark scheme. One marking point: “Inside the production possibility curve / moving towards it” …