Gas Prices and the Law of Supply and Demand - Essay Example

?Running head: Managerial Gas Prices and the Law of Supply and Demand Introduction In the field of management, there are different events which the manager needs to comprehensively understand in order to ensure that the company or the organization he is managing would not collapse or fail. These events or processes often dictate the direction of the organization; and on a larger scale, these processes are affected by, and they also impact on other organizations and global managerial dynamics. In the article of Ana Campoy and Russel Gold, entitled ‘Gas Demand Edges Higher, Lifting Crude,’ the relationship between gas prices and the law of supply and demand plays a major role into the authors’ analysis and discussion. This article shall now discuss the different elements of this article in relation to the managerial principles discussed during our managerial classes. Discussion Most of our industries, automobiles, machineries, and other mechanical equipment are run by oil. We have become highly dependent on oil and its petroleum products. There is much credit in stating the fact that our industries and everyday activities would not successfully be carried out without oil (Lefton and Weiss, 2010). It is therefore no surprise that many oil companies and conglomerates are earning much profit from their oil drilling and oil processing activities. Oil, like most commodities, is also very much affected by the law of supply and demand. The law of supply and demand is one of the primary and consistent processes which help predict the development of business and management. In its simplest terms, the law of supply and demand prescribes an inverse relationship, where, as one variable decreases, the other variable increases (Baumol and Blinder, 2007). In other words, if the supply of a certain commodity is low, then the demand becomes high, and vice versa. The prices of commodities are very much affected by this inverse relationship in the sense that, if the supply is low and the demand is high, the price for the commodity increases. In the reverse sense, if the supply is high and the demand is low, the price for the commodity decreases (Baumol and Blinder, 2007). In relation to oil prices, as the world supply for oil decreases and demand increases, the prices of oil increases; and as the world supply for oil increases and demand decreases, the prices of oil decreases. The fluctuation of oil supply is largely credited to the increasing demands of an increasing world population (Campoy and Russel, 2009). Furthermore, our oil mineral deposits are slowly being depleted; oil minerals are not something which can be manufactured or replaced once used. The next best thing for oil companies and prospectors to do would be to look for new sources of oil. However, this is only a temporary remedy to the oil shortage issue. If alternative sources of energy and fuel would not be found, the prices for oil would continue to rise and the supply for oil would continue to decrease. The price of gas as ruled by the law of supply and demand must be controlled and managed. The consumers have recognized the fact that they would not be able to afford the rising oil prices if they do not conserve their fuel consumption (Campoy and Russel, 2009). In this regard, consumers opted to cut back on their driving and save their fuel consumption for essential use only. As a result, gasoline was able to regain its supply gap and consequently push up the depressed oil prices (Campoy and Russel, 2009). Since the price of oil is very much dependent on the law of supply and demand, there is an element of managerial strategy which will always hover over the determination of oil prices. Such strategy may sometimes be attributed to the practice of hoarding or controlling the amount of oil released to the market. To some degree, this practice has been speculated by various analysts and scholars as the cause of oil price increase with oil companies seeking to gain the most profit from oil (Fessler, 2009). This speculation has not been proven; however, in understanding the law of supply and demand, this speculation has merit. In this February 2009 article, the authors set forth that from a lower demand of gasoline, its demand has steadily climbed. Consumers seem to be returning to their usual gasoline consumption prior to the world oil price hike which turned off many gasoline users (Campoy and Russel, 2009). In order to further boost this growing demand, the oil companies were keen on maintaining this production and increased their efforts towards increasing their gasoline output – adding some 16,000 barrels of oil a day from storage (Campoy and Russel, 2009). As a result, oil prices dropped and settled at a steady 39 dollars a barrel. The management of oil prices and oil supply is the province of the Organization of Petroleum and Exporting Countries. The OPEC is an organization of oil-producing countries and this organization has adopted different agreements in order to cut or increase supply of oil in order to regulate oil prices (OPEC, 2011). For the most part, this organization has been criticized by different countries because the organization seems to be unfavorably manipulating oil prices (Fernando, 2010). Other countries have lauded the organization for its attempts to equalize the oil prices in order to give all countries a chance to meet their oil demands at affordable prices. However, since the pace and advancement of the world economy is still largely dictated by developed and industrialized nations, the lesser developed countries are not significantly uplifted by the efforts of the OPEC to equalize oil prices (Fernando, 2010). In effect, the law of supply and demand is still the dominant phenomenon which would dictate oil prices. Since the bigger economic players have a stronger managerial impact on the oil prices, oil prices will remain subject to manipulation. In assessing the situation from the point of view of a manager, allowing the normal demand and supply process to occur without manipulation, fair and equitable prices can be set in behalf of the consumers. However for the manager seeking the most profit for his company, there can be an element of manipulation carried out. This manipulation can be with the supply or with the demand end. For instance, a manager can hold back supply in times when there is a need to set higher oil prices (Powell, 2008). Or in times when oil supply is abundant and there is a need to regulate supply, oil products can be held back in order to prevent flooding the market with excessive oil supply. Surplus in supplies can be unfavorable to the market because retailers would be prompted to dispose of the commodities immediately. In order to do this, they would have to decrease oil prices (Eicher, et.al., 2009). In applying strong managerial skills, managing oil prices in accordance with the law of supply and demand, has to be in line with ethical practices, as well as the actual state of our oil supply and demand (Cooper and Argyris, 1998). Manipulation of supply and demand is clearly an unethical managerial practice which does not serve the interests of the people, most especially the lesser developed nations. Moreover, these lesser developed nations are already very much dependent on world oil prices and the world economy. The world economy is in fact dictated by the developed nations, some of which are already oil-producing countries. As a manager, the actual state of oil supply and demand has to be used in order to dictate oil prices. The regulation of the OPEC has not served to protect the interests of all nations; in fact, the oil-producing nations remain to be the largest benefactors of the regulation measures of the OPEC. As a manager, the regulation of oil prices has to be set forth under the law of supply and demand because it is a natural process which can be sustained in the actual setting. Our dependence on oil has become extensive enough; however, our oil supply is continually being depleted. The rest of the world has to know the real state of affairs in terms of oil supply in order to ensure that the right decisions are being made to fill in the actual need. Works Cited Baumol, W. & Blinder, A. (2007) Microeconomics: Principles and Policy. California: Cengage Learning Campoy, A. & Gold, R. (2009) Gas Demand Edges Higher, Lifting Crude. Wall Street Journal. Retrieved 18 February 2011 from http://online.wsj.com/article/SB123508837588127981.html Cooper, C. & Argyris, C. (1998) The concise Blackwell encyclopedia of management. Massachusetts: John Wiley and Sons Eicher, T., Mutti J., & Turnovsky, M. (2009) International Economics. New York: Routledge Fernando, V. (2010) OPEC's Manipulation Of Oil Prices Is Looking Like A Huge Success Right Now. Business Insider. Retrieved 18 February 2011 from http://www.businessinsider.com/this-makes-opecs-attempt-to-manipulate-oil-prices-look-like-a-huge-success-2010-9 Fessler, D. (2009) Crude Oil Prices: The Best Way To Play The Coming Oil Rebound. Daily Markets. Retrieved 18 February 2011 from http://www.dailymarkets.com/contributor/2009/04/23/crude-oil-prices-the-best-way-to-play-the-coming-oil-rebound/ Lefton, R. & Weiss, R. (2010) Oil Dependence Is a Dangerous Habit. American Progress. Retrieved 18 February 2011 from http://www.americanprogress.org/issues/2010/01/oil_imports_security.html Powell, B. (2008) Petroleum Prevarication. Exponential Improvement. 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