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?
(Because of copyrights, the complete official question is not copied here. You can access the question here: GMAT Club)
Difficulty: Medium
Accuracy: 73%
Based on: 4160 sessions
Solution
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,
- There has been an oil-supply disruption in Europe.
- That disruption has made oil more expensive internationally.
- 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
Answer Choice: A
Incorrect
Selected by: 11%
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.
Answer Choice: B
Incorrect
Selected by: 9%
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.
- Oil tankers may be used only for transportation and not for storage.
- 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.
- 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.
Answer Choice: C
Incorrect
Selected by: 4%
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.
Answer Choice: D
Correct
Selected by: 73%
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.
Answer Choice: E
Incorrect
Selected by: 4%
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.
If you have any doubts regarding any part of this solution, please feel free to ask in the comments section.

Anish Passi
GMAT Coach
With over a decade of GMAT training experience, top 1 percentile scores on the CAT and GMAT, and a passion for teaching, I’d like to believe I am quite qualified to be a GMAT coach. GMAT is learnable, and I help students master the GMAT through a process-oriented approach based on logic and common sense. I offer private tutoring and live-online classroom courses. My sessions are often sprinkled with real-world examples, references to movies, and jokes that only I find funny. You’ve been warned 🙂