either a Hicksian or Slutskyian approach.In the right hand side of the Slutsky equation, the first term refers to substitution effect while the second refers to the income effect, both of which determine a response of quantity demanded to changes in price.(Q/P)=( Q/P) - Q(Q/Y) constant utility constant priceswhere Y = IncomeIn an upward trend of prices in the demand curve we presented for oil, the algebraic addition of the two terms must be equal to zero if demand is perfectly inelastic as prices increase from a low level. However, as quantity demanded responds to a further rise in the price of oil, the addition of the two terms must be negative.Similarly, in a downward trend of prices, the addition of income and substitution effects must be equal to zero if demand is perfectly inelastic. As quantity demanded increases with further decline ill the price of oil, the algebraic addition of the two effects must be negative while the resulting amounts, in absolute terms, keep increasing as prices fall farther.(http://www.georgetown.edu/users/johnsonj/oweiss/petrod/time.htm)US Middle East Policy and OilIn 1973, the Arab oil embargo dealt the U.S. economy a major blow. This, combined with OPEC subsequent price hikes and a growing American dependence on foreign oil, triggered the recession in the early seventies. As of the first quarter of 1998, the U.S. economy was strong and oil prices were falling, however, overall reliance on foreign oil has increased.In 1973, foreign oil accounted for 35 percent of total U.S. oil demand. By the beginning of 1998, the figure had risen to 50 percent. Though OPEC provided 46 percent of U.S. imports, the dominant suppliers are non-Arab members (notably Venezuela, America's number one supplier, and Nigeria). In fact, Saudi Arabia (#3), Algeria (#9) and Kuwait (#12) were the only Arab countries among the top 20 suppliers of petroleum products to the United States in 1997. The Persian Gulf states supply less than...
