If the statement in the passage concerning oil-supply disruptions is

Question

If there is an oil-supply disruption resulting in higher international oil prices, domestic oil prices in open-market countries such as the United States will rise as well, whether such countries import all or none of their oil.

If the statement in the passage concerning oil-supply disruptions is true, which of the following policies in an open-market nation is most likely to reduce the long-term economic impact on that nation of sharp and unexpected increases in international oil prices?

(A) Maintaining the quantity of oil imported at constant yearly levels

(B) Increasing the number of oil tankers in its fleet

(C) Suspending diplomatic relations with major oil-producing nations

(D) Decreasing oil consumption through conservation

(E) Decreasing domestic production of oil

Same passage with other question:  LINK

anandnk · Accepted Answer

Open market(As I understand it) : A market where the seller is free to set any price and the price is not subject to government regulations. Also anyone can sell in that market.

With this definition I proceed to answer your question.

If there is sharp increase in the price of oil in the international
market then what happens in the different countries ?

1) Countries which import oil - They will be affected because they will now
pay higher price.

2) Countries which import no oil at all - Means they either have oil
sufficient to cater to local market and may have extra oil to export.
Here if the international prices rise then local producers might export
oil to earn bigger profits and local consumer will suffer. In fact
oil prices will rise here also because there is less oil available for
consumption.

So whether or not a country imports oil that country will suffer if the
international prices rise.

The best way to counter this problem is decrease consumption through
conservation.

If oil consummption is decreased then countries which import oil will
suffer less and also those countries which import no oil will not suffer
more.

I hope my explanation matches with OA and is acceptable.

AnishPassi · Answer

The Story

If there is an oil-supply disruption resulting in higher international oil prices, domestic oil prices in open-market countries such as the United States will rise as well, whether such countries import all or none of their oil.

The statement talks about the impact of higher oil prices on open-market countries.

If oil-supply is disrupted 
 And, if as a result, international oil prices increase 
 Then, open-market countries will also feel the brunt. What brunt? 
 Their local oil prices will also rise 
 And that too irrespective of whether they import all or none of their oil

That last portion (“whether such countries import all or none of their oil”) is intriguing.

If a country imports oil, their domestic oil prices will rise if oil-supply is disrupted.  
  If a country does not import any oil, even then its domestic oil prices will rise if the international oil-supply is disrupted.

Say, 
 
1. There has been an oil-supply disruption in Europe.
2. That disruption has made oil more expensive internationally. 
3. The United States does not import any oil.

Even in this scenario, oil will become more expensive in the US.

Question Stem

If the statement in the passage concerning oil-supply disruptions is true, which of the following policies in an open-market nation is most likely to reduce the long-term economic impact on that nation of sharp and unexpected increases in international oil prices?

That’s a fairly long question. Let’s break it down.

If oil prices do fluctuate in open-market countries the way it has been explained in the passage, which policy should such a country adopt?

Policy for what purpose?
So that the long-term economic impact will likely be reduced.

Impact of what? 
Impact of sudden and sharp increases in international oil prices.

I’m imagining the following scenario:

The US Department of Policy-making: 
 
 Guys, oil-supply disruptions make oil more expensive internationally.  
 We don’t import any oil, yet our oil prices also go up in such circumstances. 
 International oil prices could rise suddenly and sharply in the future too. 
 Such international disruptions should not have long-term economic impact on us.  
 Let us come up with a policy that tries to ensure that.

I’m going to look for such a policy in the answer choices.

Answer Choice Analysis

(A) Maintaining the quantity of oil imported at constant yearly levels 
  Incorrect.    
Would a policy to import the same quantity of oil every year help?
No.

If a country imports a fixed quantity of oil every year, at the time of an international price rise, they would need to pay more for their imports. Then domestic oil prices would also rise. That would not mitigate the negative economic impact.

I have explained this with an example:

Say, a country imports 100 million litres of oil every year.
Say oil-supply suddenly reduces, and the price per litre of oil goes up by $5.
To continue to import the same quantity of oil, the country would need to pay more money.

Now whether they pass on this additional expense to the consumers or pay from their reserves, the economy will be negatively affected.

Such a policy will not be helpful.

(B) Increasing the number of oil tankers in its fleet 
  Incorrect.    
Let’s deal with the following variation first:
(B’) Increasing the oil reserves the country maintains

Would such a policy be helpful?

I think so.

Scenario time:
 
 A country has an annual demand of 100 million litres of oil  
 When there are no disruptions in oil-supply, the country imports excess oil and builds its reserves 
 Over some time, the country has saved up 120 million litres of oil in its reserves 
 At that point, there is a disruption in oil-supply

Now, the country could use its oil reserves to sail through the slump.

Granted, maintaining oil inventory would also be expensive. However, those costs would not be sudden. The country can plan to systematically pass on these costs to the consumers.

If the objective is to reduce the long-term economic impact on that nation of sharp and unexpected increases in international oil prices, the policy would be helpful.

Now, back to the original answer choice.

Does ‘increasing the number of oil tankers’ imply that the country is increasing its reserves?

No.
 
1. Oil tankers may be used only for transportation and not for storage.
2. Even if the oil tankers are used for storage, we don’t know whether the current oil reserves are constrained by the current number of tankers. Maybe the country already has spare tankers.
3. Even if the country currently doesn’t have spare tankers and they increase the number of tankers, we don’t know whether the country will have the money to buy excess oil to keep as reserves.

So a policy to increase the number of oil tankers will not help the country mitigate the economic impact of sudden and sharp oil price increases.

(C) Suspending diplomatic relations with major oil-producing nations 
  Incorrect.    
How would such a policy help?

I think  improving diplomatic relations with major oil-producing nations  could help. The nations control the bulk of the supply. So, better relations with them might fetch the country a better price even in the case of an oil-supply disruption.

Suspending the relations could make matters worse.

(D) Decreasing oil consumption through conservation 
  Correct.   
This option talks about reducing demand. If there is a policy to reduce the demand of oil, even if the supply of oil is disrupted, the economic impact of the sudden increase in oil prices will be mitigated.

One way to counter the impact on price of reduced supply is to reduce the demand. Such a policy will be helpful.

(E) Decreasing domestic production of oil 
  Incorrect.    
This option talks about reducing domestic supply. The passage mentioned that domestic oil prices in open-market countries will rise, whether the countries import all  or none  of their oil. So, if there is a disruption in oil-supply, domestic oil prices will rise – irrespective of the domestic supply.

A supply-side policy will not help. A demand-side policy (like one mentioned in option D) can.

venksune · Answer

D for me.

Two issues - Oil Prices and Oil distribution.

Open market policy dictates pricing depending on Oil availability/supply/disruption / such situtations. No one can do anything about it. 

High oil prices and uncertain supplies are a typical problem not only for the United States, but also for the world economy. What's the best way to control it? Yep - Can be controlled by conservation.

Quick note on Open market oil policy (leisure read)
Oil prices are determined by the trading of 1,000-barrel contracts of West Texas Intermediate oil in an open market bid system on the New York Mercantile Exchange. Worldwide prices are adjusted from this price for oil quality and distance from markets. Oil producers, mostly governments, sell their oil into this world market system and refiners buy from it for oil to refine into products for their customers. The ownership of a particular barrel of oil may change several times between production and refining.  This is a worldwide, largely open market; oil companies have little or no influence on these prices and participate in the trading market on the same basis as any other trader or investor .

u2lover · Answer

I believe this is OG question...

I think it is b/w D and E... I choose D because we don't know that US produces oil, according to this argument

(A) out of scope
(B) oil tankers w/out oil make no sense :lol:

(C) and what will be achieved by doing so?

(C) and what will be achieved by doing so?

Skywalker18 · Answer

If there is an oil-supply disruption resulting in higher international oil prices, domestic oil prices in open-market countries such as the United States will rise as well, whether such countries import all or none of their oil.

If the statement in the passage concerning oil-supply disruptions is true, which of the following policies in an open-market nation is most likely to reduce the long-term economic impact on that nation of sharp and unexpected increases in international oil prices?

Pre-thinking-
In an open market, the domestic oil producers will try to export their in order to maximize their profits . So the government can 
- Reduce the oil consumption by encouraging usage of alternative energy
- Impose sanctions/taxes against export of domestic oil - This may not be a viable option in an open market

A. Maintaining the quantity of oil imported at constant yearly levels - This will not help and domestic market will still be susceptible to fluctuations in international crude price

B. Increasing the number of oil tankers in its fleet - It does not help

C. Suspending diplomatic relations with major oil-producing nations - It does not help

D. Decreasing oil consumption through conservation - Correct - decreasing consumption or moving towards alternative energy

E. Decreasing domestic production of oil - It means the country has to import more oil if the domestic demand is at the same level

Answer D

matteotchodi · Answer

like in every day life.... if there is something that affects you, how do you decrease the degree to which it affects you? by relying less on that thing/person/etc

Conservation is a good way for the US to be less impacted by oil

KeyurJoshi · Answer

I chose D with POE even though I was not straight away aware of the open market concepts

If there is an oil-supply disruption resulting in higher international oil prices, domestic oil prices in open-market countries such as the United States will rise as well, whether such countries import all or none of their oil.

If the statement in the passage concerning oil-supply disruptions is true, which of the following policies in an open-market nation is most likely to reduce the long-term economic impact on that nation of sharp and unexpected increases in international oil prices?

(We need to reduce the effects of fluctuating international oil prices in the country but keeping in mind that even though our country may not import oil internationally at all, it will still affect us)

(A) Maintaining the quantity of oil imported at constant yearly levels - Quality of oil has nothing to do with this, our country will be impacted, nevertheless.

(B) Increasing the number of oil tankers in its fleet - We dont know if increasing tankers will result in lesser economic impact, we can still import oil to fill those tankers up right? Requires further assumtions.

(C) Suspending diplomatic relations with major oil-producing nations - Little extreme, this will not help since if we suspend relations and as a result DO NOT import oil from them, notice in the argument that we will still be affected.

(D) Decreasing oil consumption through conservation - This may be the best of all. Even though price fluctuations can impact us, we can control demand so as to reduce the consequences of sudden changes in price to fulfil say, sudden demands.

(E) Decreasing domestic production of oil - I dont think decreasing domestic production will reduce the impact, we can import oil from other countries and this action may affect us, plus this is a little extreme measure.

mSKR · Answer

Hi  AndrewN   AjiteshArun   DmitryFarber

(B) Increasing the number of oil tankers in its fleet
---> doesn't necessarily mean save oil for future?
can these tankers be empty--> but imagining this doesn't make sense in practical sense.

My query:
We literally stick to what is given? We must not think that these tanks have oil.

( Issue: When I think the oil is saved in number of tankers, then it may reduce effect of fluctuating oil prices on domestic market to some extend . Because now we have extra supply . 
(D says : reduce demand, B says increase supply.)

Please share your opinion.

Thanks!

AjiteshArun · Answer

Hi  mSKR ,

More tankers could help reduce the chances of a supply disruption, but that is irrelevant in this particular situation. Let's go through the statements in the question:

1.  If there is an oil-supply disruption resulting in higher international oil prices, domestic oil prices in open-market countries will rise, whether such countries import all or none of their oil.  ←  If  ~ a disruption leads to higher international prices, domestic prices in OMCs  will  increase . Effectively,  even if a country does not import any oil,  domestic prices will still go up  .

2.  If the statement in the passage concerning oil-supply disruptions is true, which of the following policies in an open-market nation is most likely to reduce the long-term economic impact on that nation of sharp and unexpected increases in international oil prices?  ← The question asks us to reduce the impact of sharp and unexpected increases in oil prices.  This means that we're looking at a situation in which international prices have already gone up .

At this point, supply-side actions won't help. The only thing we can do here is change demand so that the increase in prices doesn't affect OMCs.

Think about it this way: if you know that an increase in international prices will lead to an increase in prices in OMCs, and such an increase in international prices has already occurred, how will you reduce the long-term economic impact (demand * change in price) of that increase? Well, if we don't use any oil (demand = 0), it won't matter what the price of oil is. The economic impact of that increase will be 0. The correct option is  ~ reduce demand by reducing wasteful usage. This will reduce the impact of an increase in oil prices (P goes up, but D goes down).

MBAcandidate1005 · Answer

If there is an oil-supply disruption resulting in higher international oil prices, domestic oil prices in open-market countries such as the United States will rise as well, whether such countries import all or none of their oil.

If the statement in the passage concerning oil-supply disruptions is true, which of the following policies in an open-market nation is most likely to reduce the long-term economic impact on that nation of sharp and unexpected increases in international oil prices?

(A) Maintaining the quantity of oil imported at constant yearly levels

(B) Increasing the number of oil tankers in its fleet

(C) Suspending diplomatic relations with major oil-producing nations

(D) Decreasing oil consumption through conservation

(E) Decreasing domestic production of oil

The gist of the statement is that there is an impact chain starting with supply disruption --> affecting international oil prices --> affecting domestic oil prices to go up. This happens to open market countries even if they do not import at all. We can understand here that there is some connection of impact between international prices and domestic prices that is not affected at all by importing oil.

The stem asks us to choose a policy that will reduce the impact of future unexpected rises in international prices. Note here that we do not have to eliminate the impact but only reduce the impact that is bound to happen. Also, we have to reduce impact of unexpected rises in international oil prices (which we know happens when there is supply disruption which means lower supply for any reason).

A) Maintaining the amount of oil as constant will not reduce the impact as supply disruption will cause international prices to rise and then domestic prices will be affected badly too. This option could have been correct if it was phrased such that reducing the amount of oil supply over the years. This would have made the country less reliant on the supply and the disruption would not have a great impact. Thus, reducing the impact.

B) Increasing the number of oil tankers in fleet would mean increasing the dependence on the supply of oil, this would go against reducing the impact as more demand for oil and disruptions would mean greater negative effect on the country.

C) Suspending relations with oil producing nations could mean lower supply of oil for the nation. Thus, increasing dependence on whatever supply of oil is left in the international market. Making us more vulnerable and doing opposite of what we are trying to do.

D) Decreasing oil consumption could be thought of as reducing the demand for oil in the country. For example shifting to renewable sources as an example. Then disruption in oil supply will have a much lesser impact on domestic prices even if international prices are rising as the lower supply is still either enough or slightly lower than the demand in this scenario. Hence, reducing the impact and also the correct option.

E) Decreasing domestic production just increases the nations' dependence on international oil and hence more susceptible to risks from international oil prices. Opposite of reducing the impact.

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