Shifting Crude Oil Prices - Essay Example

The two countries can benefit from trade since their trade-offs between eggs and fish are different. In such a case, country B has a relative advantage in producing fish while country A has a relative advantage in producing eggs. The two countries can major on what they can best produce and bring forth to the market for trade. Each country can therefore benefit by specializing in producing goods and services where it has a comparative advantage and trading the goods with the partnering country.

The researcher intends to discuss oil production about the shifting cost of oil. To understand the cause of escalating oil prices in the world, it is imperative to establish the determinants of supply and demand. In addition, it is vital to study factors that cause demand and supply curves to shift as this will indicate the effects on prices and quantity of oil when equilibrium changes. To start with, the interaction between buyers and sellers in any given market determines the prices of goods. Prices are indicators of a shifting supply and demand, which causes a change in market prices and consequently affects incentives for consumers and producers. This paper will mainly focus on how demand/supply forces cause price adjustments in the oil market. The rising cost of oil is mainly due to the rise in popularity of hybrid vehicles, increased use of plastics in the making of products, depleting crude oil resources in the world, and oil drilling actions in preserves such as Alaskan (Schmitz, 2011). These actions cause shifts in demand and supply as illustrated below. The rising popularity and manufacture of hybrid vehicles that take in a large amount of fuel cause a shift in demand.

Increasing use of plastics in the production of goods causes a shift in demand for oil towards the right given constant supply, this trend causes a shift in price from the lower PE to a higher price P2 as shown. Q2 indicates the quantity demanded because of the shift.

A decline in production and supply of crude oil worldwide due to declining levels of crude oil results in a shift in price from equilibrium to P2 and a consequent drop in the equilibrium quantity demanded.

Oil drilling actions in more areas of Alaskan preserves cause a shift in supply and an increase in prices.

These reasons coupled with an increase in demand for oil causes the demand curve to shift to the right where both the price and quantity of oil sold increase. If this trend remains as it is there is a possibility that the quantity demand for oil will go up and at the same time a price rise is expected.

On the other hand, the decrease in the supply of crude oil caused by political instability in oil-producing countries such as Libya has had a sharp decline in the quantity of oil sold in the market today. The effect has prompted an increase in demand, and prices and a consequent move in the supply curve to the left as shown.

Opportunity cost refers to what you forego to achieve what you want (Mankiw, 2011). It involves choosing the best alternative out of the available options. The intention in opportunity cost is choosing the most preferred alternative, which should be desirable, and well-paying than the options foregone. The modern world is having trouble looking for the best alternative to solving the current shortage of fuel. This search can be likened to the options available for a certain industry to either produce guns or butter. Read More