How Do Changes in Supply and Demand Affect Oil Prices - Essay Example

?Demand and Supply HOW DO CHANGES IN SUPPLY AND DEMAND AFFECT OIL PRICES? The marketplace powers of demand and supply mainly regulate the prices of the oil. If demand hikes or if an interruption in supply happens, there will be growing burden on prices. Similarly, if demand reduces or there is an oversupply of the respective product in the market, there will definitely be downward force on the prices. There are multiple factors that play a major role in defining oil prices such as natural disasters, governmental regulations, market demand and supply of the products such as heating oil, natural gas, gasoline and crude oil (Chevron Corporation, “What Affects Fuel Pricing-Basics of Supply & Demand”). With regard to the case assignment reading i.e. "What is Driving Oil Prices?" by Richard G. Anderson and Jason J. Buol, it is observed that in the period of August 2004, according to the observation of the International Energy Agency, global oil demand had been rising faster in comparison with any other phase in the previous 16 years. A key reason behind such hike in demand is the quick economic expansion of a number of nations in particular China. Moreover, China had accounted for around 40% of the demand growth regarding global oil production in the period of early 2000s and this demand had been expected to augment rapidly. With regard to supply, it can be said that issues such as political conflicts in nations like Iraq and Venezuela have had a major effect on the fluctuation of oil prices. Contextually, as per the assessment made, it is determined that factors such as enhanced speculation can be a major aspect in affecting oil prices (Anderson and Buol, "What is Driving Oil Prices?"). Both the demand & supply of oil are comparatively inflexible in the short run period. Changes in price have modest impact on either the ‘quantity supplied’ or the ‘quantity demanded’. When oil prices hike, people spend substantial time as well as energy complaining about such circumstances, but at least in the short run period they render almost no effort in trying to adjust their habits to consume in a less quantity. Correspondingly, changes in price do little to encourage new supplies in the short run. Discovering for, drilling, and getting fresh sources on-line can take a number of years. Meanwhile as the quantities demanded as well as supplied change very less as the prices rise & fall, both the curves are reasonably vertical as shown below: Figure 1: Elasticity and Prices Source: (Stonebraker, “Demand and Supply Applied: Oil Prices”) Due to the reason that quantities are reasonably fixed in the short run period, any alteration in supply or demand will bring about considerable extent of changes in price. For example, if it is assumed that supply has fallen, the reduced supply generates a short-term shortage that will begin to boost price. If demand is elastic, only a small hike in price will be needed to get consumers to cut their purchases to as much as necessary in order to meet the new lowered output. Nonetheless, in the oil industry if demand is inelastic, it will assume a much greater price escalation to create the required reduction in quantity necessitated (Stonebraker, “Demand and Supply Applied: Oil Prices”). 2a. EXPLAIN WHAT HAPPENS TO QUANTITY OF OIL DEMANDED WHEN THE PRICE OF OIL DECREASES, ASSUMING THAT THE SUPPLY DOESN’T CHANGE. Quantity demanded generally refers to a definite amount that will be demanded each unit of related time at a specific price, if other aspects remain fixed. Market equilibrium is a condition where demand and supply for a certain product matches. The price and quantity only remains fixed at the point of interaction of the demand and supply curve. In accordance with the question, it can be stated that if the price of oil falls then the quantity of oil demanded will definitely surge as oil is a price sensitive product and its demand stands always higher. In terms of movement of curve, it can be said that the curve will shift to the right. The effect of the above circumstances can be seen more in developing countries such as China and India because according to U.S. Energy Information Administration (EIA) forecasts, China’s oil industry will continue to grow at a tremendous rate and its quantity demanded will be reaching 12.8 million ‘barrels per day’ by the end of 2025. Thus, from the above explanation, it can be stated that if supply does not change and the price of the oil decreases then the consumption of the oil in the short run will increase to a great extent. 2b. EXPLAIN WHAT HAPPENS TO THE PRICE OF OIL AND QUANTITY OF OIL SUPPLIED WHEN CONGRESS APPROVES DRILLING FOR THE RESERVES IN ALASKA, ASSUMING THAT THE DEMAND DOESN’T CHANGE. As stated by a national plan by federal government, Arctic territory off the Alaska is a vital constituent of the United States national and energy security interest. A federal government 13-page national strategy stated the Arctic region off Alaska has conventional oil & natural gas resources which make up about 13% of the globe’s undiscovered oil and 30% of the unexplored natural gas (BIC Alliance, “Arctic Oil, Natural Gas Defined as U.S. Priority”). In a situation when demand for oil is unchanged and Congress approves the drilling for the reserves in Alaska then due to the hike in production from new drilling plant, global quantity supplied will be increased, as a result price of the oil in international market will decline a little bit. As stated earlier 30% of the unexplored natural gas and 13% of the world’s undiscovered oil are situated under the surface of Alaska, thus there are huge production possibilities in the region. Though there are some adverse environmental impacts due to such endeavors but with the progression in drilling activities, there can be hike in supply and reduction in the oil prices. In this scenario, if demand does not change, with an increase in supply, the supply curve shifts to the right. 2c. EXPLAIN WHAT HAPPENS TO THE PRICE OF OIL AND QUANTITY OF OIL DEMANDED WHEN IF CHINA EXPERIENCES RAPID ECONOMIC GROWTH, ASSUMING THAT THE SUPPLY DOESN’T CHANGE. China is one of the rapidly rising economies in the world. Though it is a developing country but speedily it is turning out to be a developed one. Its Gross Domestic Product (GDP) growth rate is 9.2% which is the highest in the globe (The Heritage Foundation, “Quick Facts”). According to the EIA forecasts, the demand for oil in China is growing continuously and is going to reach 12.8 million barrels/day by 2025, along with net imports figure of 9.4 million barrels/ day. This explains the fact the demand for oil in China is going to double in the next 20 years (Anderson and Buol, "What is Driving Oil Prices?"). In accordance with the question, if the global quantity supply of oil does not change then the price of oil in the world market, especially in China will definitely rise with regard to the increase in its demand. This is because according to the law of demand and by considering other things to remain fixed, if demand for a particular product rises then accordingly its price also increases (Stonebraker, “Demand and Supply Applied: Oil Prices”). 3. GAS PRICES HAVE REACHED RECORD HIGHS IN MANY STATES. WOULD YOU ADVOCATE A PRICE CONTROL FOR OIL SO THAT YOU PAY LESS THAN THE MARKET PRICE AT THE PUMP? WHY OR WHY NOT? Price of the natural gas expended is regulated by the demand, supply along with other associated market situations. Oil and the entire oil related market which includes heating oil, natural gas, gasoline and crude oil depend upon one another. If the gas prices touched record highs in many states then a person cannot pay less than the market price at the pump. In this regard, the example of 1973 Oil Embargo related crisis can be highlighted. During this period of 1979-80, rapid development was made in augmenting oil production of American by reducing its reliance on oil imports and improving end-use related efficiency. In the mid-1980s, the pace in terms of gaining efficiency slowed down and US oil production fell (The Energy Information Administration, “Administrator's Message”). Owing to the reason that the demand for oil especially depends upon the world market, so for an oil and gas importing state it is not possible to control the price of oil. Therefore, a price control for oil cannot be advocated where people pay less than the market price at the pump. One always needs to go with the international market scenarios. Works Cited Anderson, Richard G. and Jason J. Buol. "What is Driving Oil Prices?" The Regional Economist, 2005. Web. 28 Jul. 2013. . “Arctic Oil, Natural Gas Defined as U.S. Priority.” Bic-Magazine. BIC Alliance, 2013. Web. 28 Jul. 2013. < http://www.bicalliance.com/bic-magazine>. “What Affects Fuel Pricing-Basics of Supply & Demand.” Supply And Demand Overview. Chevron Corporation, 2013. Web. 28 Jul. 2013. . Stonebraker, Robert J. Demand and Supply Applied: Oil Prices. Winthrop University, 2013. Web. 28 Jul. 2013. < http://faculty.winthrop.edu/stonebrakerr/book/oilprices.htm>. “Quick Facts.” China. The Heritage Foundation, 2013. Web. 28 Jul. 2013. . “Administrator's Message.” International. The Energy Information Administration, n.d. Web. 28 Jul. 2013. . Read More