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Article - The Sydney Morning Herald

New South Wales in recent years has battled against a sparse supply of oil. In addition to this the region has also had to be content with high prices of oil leading to many commercial problems involved with transportation. Oil prices have continued to rocket to a sky high US$135 per barrel and this is likely to increase further. The geographical location of Australia doesn't help either.

Oil is important for freight transport. The article implicated NSW as the epicenter of the problems but the problems are far reaching and impact the entire country. To ease the problems facing the nation the NSW Government needs to radicalise freight transport and urban environments in order to help Sydney against any future shortages in oil. As well as this the government needs to prioritise the delivery of fuel to certain organisations that need it most. (Deffeyes, 2006)

The price of oil nevertheless has an effect on the NSW economy. Both the AS/AD and AE models of the economy shed some light on what effect of the increase on oil prices has on the domestic economy, but a more complete understanding of the effects is achieved if both models were used in conjunction. In the AS/AD model, the aforementioned decrease in aggregate domestic supply results in the short run AS line shifting to the left from AS0 to AS1 as shown on the graph on the next page. Also, since the rise in oil prices represents a loss of income to oil consumers in energy-consuming countries such as Australia, it is likely that aggregate demand will now be slightly weaker at all price levels, thus shifting the aggregate demand curve in the model below to the left, albeit not as much as the AS curve. Price level Real GDP AS0 AS1 Long run AS AD New equilibrium Original equilibrium. This result creates a contractionary output gap as equilibrium with a higher price level and production level below potential GDP is established. Thus rising oil prices causes the economy to experience both inflation and recession a very unfavourable condition known as stagflation". Stagflation accentuates the problem with inflation, as high unemployment coupled with high prices leads to a dramatic decrease in living standards. The usual problems of high unemployment, such as lost production, incomes and human capital also plague the economy. (Ball, 2006, pg19)

The article is very shrewd and in depth and the problems associated with it are long term but the recommendations are short term to provide a long term solution. Oil is indeed expensive but the problems lie far afield for NSW and the real solution lies in distributing fuel evenly and only importing what is actually needed and bargaining with suppliers to make sure that the best deal is possible. A shrewd option would be generate a campaign and raise awareness about how to spend money appropriately. Asking people to shift transport mode i.e. to railways would provide relief.

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