International Economics 14th Edition by Thomas Pugel

Exercise 8

IN₂007, the United States imported about 3.7 billion barrels of oil. Perhaps it would be better for the United States if it could end the billions of dollars of payments to foreigners by not importing this oil. After all, the United States can produce its own oil (or other energy products that substitute for oil). If the United States stopped all oil imports suddenly, it would be very disruptive. But perhaps the United States could gain if it gradually restricted and then ended oil imports in an orderly transition. If we allow time for adjustments by U.S. consumers and producers of oil, and we perhaps are optimistic about how much adjustment is possible, then the following two equa­tions show domestic demand and supply conditions in the United States:
Demand: P = 291 40· Q D
Supply: P = 0.5 + 35· Q S
where quantity Q is in billions of barrels per year and price P is in dollars per barrel.
a. With free trade and an international price of $67 per barrel, how much oil does the United States produce domestically How much does it consume Show the demand and supply curves on a graph and label these points. Indicate on the graph the quantity of U.S. imports of oil.
b. If the United States stopped all imports of oil (in a way that allowed enough time for orderly adjustments as shown by the equations), how much oil would be produced in the United States How much would be consumed What would be the price of oil in the United States with no oil imports Show all of this on your graph.
c. If the United States stopped all oil imports, which group(s) in the United States would gain Which group(s) would lose As appropriate, refer to your graph in your answer.