Generally, an increased supply of a commodity usually reduces the price of commodities. However, this is not always the case since some goods do not respond to this rule. Several non-price factors might lead to increasing prices as supply also increases. These exceptional cases have been witnessed in the United States where oil prices continue rising despite increased supply of the commodity that is produced locally as well as outsourced from the Middle East.
According to the law of supply, the higher the prices of a commodity usually relates to increased supplies. Therefore, in my opinion, the price of oil in the United States has been increasing thereby inviting more suppliers. In this case, I consider that the price increase is responsible for increased supply.
According to economic analysts and industry experts in the United States have said that the unrest in the Middle East is responsible for the increasing prices of oil in the U.S. In their opinion, spreading political violence in the Middle East, for instance, Syria’s civil war, has increased the production and transportation cost of oil from the Middle East to the United States, thereby increasing the price of oil.
Additionally, in the United States, domestically produced fuel is being turned into diesel fuel to support trucking fleets. Therefore, drivers are using most of the oil outsourced from the Middle East. Even though there is domestic oil production in the United States, this locally produced oil is not sufficient to control the oil prices. Countries that entirely depend on oil from the Middle East, the oil prices are relatively high compared to the United States.
Absolute advantage refers to a situation where an economy can produce good using minimal resources with maximum production. On the contrary, comparative advantage refers to a situation where an economy can produce a good at smaller opportunity cost compared to its trading partners (Tucker, 2012). The mentioned scenario would mean that the U.S. produces oil at reduced cost compared to other commodities.
References:
Schneider A. & Geewax M. (June 20, 2013). If Supplies Of Oil Are Up, Why Is Gas Still Pricey? NPR. Retrieved from http://www.npr.org/2013/06/20/193612572/if-supplies-of-oil-are-up-why-is-gas-still-pricey?utm_source=npr&utm_medium=facebook&utm_campaign=20130620
Tucker I. B., (2012). Macroeconomics For Today, 8th ed. Stamford, Connecticut Cengage Learning.
