The Supply and Demand behind United States Oil Prices - Research Paper Example

? The supply and demand behind United s Oil prices of the Introduction The macroeconomic conditions existing globally play an influential role in setting the international demand for liquid fuel. In this era of globalization the International Energy Agency has put forth that high prices of oil in general create considerably adverse effect on the economic growth of the global economy. Seven crucial factors have been identified by the U.S. Energy Information Administration which contribute to as well as influence “the spot price of crude oil” (Fessler, 2011). These factors are production, supply, global oil stock, financial markets, demand, non-OECD demand and spot market. Production: The Organization of Petroleum Exporting Countries (OPEC) syndicate accounts for 40 percent of the entire production of oil at the global level. The export of oil by the OECD countries represents approximately 60 percent of the total amount of oil traded in the international markets. The size of supply of crude oil by the OPEC countries is considerably large. This makes its activities and statements influence the oil prices prevailing in the world. Deliberate reduction in production by the OPEC countries leads to fall in prices of oil internationally.  Supply: 60 percent of the world’s oil supply comes from the non-OPEC countries. Although the group of non- OPEC countries is greater in size than the OPEC group, they are the price takers in the international market. This is because they do not enjoy any spare capacity. This implies that these suppliers merely act according to the market prices rather than making attempts to manipulating them. That is, they respond to market prices rather than attempting to manipulate them. The non OPEC countries produce nearly at the full capacity and lapse in production leads to rise in total oil supply. It gives the OPEC the facility to further maneuver world supplies.   Global oil inventories: Inventories of oil maintained globally balance the demand and supply of oil in the world. In case of greater production of oil than the level of demand, excess supplies are stored as inventories. Again these inventories can be used in a reverse situation. When consumption becomes greater than demand, inventories are utilized to meet this incremental demand. The relationship existing between the oil prices and inventories of oil allows the market to correct the effect of any disruptive activity. If the inventory is building up, it implies that there is excess supply. In this situation, oil prices drop ultimately leading to a fall in production. Thus it brings a balance between demand and supply. On the contrary, if the level of inventory is negative, there is a shortage of supply compared to the demand level. The oil prices would rise and production of oil would also increase.  Financial markets: Trading in oil does not only involve the physical market. Oil brokers also make trade contracts that relate to future dealings in oil. Future delivery of oil is termed as “futures”. There are customers, such as airlines, that purchase futures in order to hedge against the possibility of oil price rise in future. This might bring unfavorable effects on the ability of the company to operate efficiently and profitably. Often oil producers make future contracts so that it might deliberately lock the price for a particular time period.  Demand: The Organization of Economic Cooperation and Development (OECD) mostly consist of the United States and the greater part of Europe and some other advanced countries. This organization takes the responsibility of the world’s 53 percent of the total oil demand (Fessler, 2011). The member nations consume oil in much higher quantity than the non-OECD countries. However, they exhibit a lesser rate of growth. The demand from the OECD countries has gone down while that by the non OECD countries has gone up in the period of 10 years between 2000 and 2010 (Fessler, 2011).   Non-OECD demand: China, Saudi Arabia and India together had the largest growth in crude consumption among non-OECD countries for the last decade. The rate of increase in oil consumption in any particular country is taken as an indicator of economic growth achieved by that country. There is a direct relationship between consumption of fuel by an economy and its economic growth. This fact might be considered with the phenomenon that the US import of oil is falling while the consumption of oil by developing countries like China and India is almost sky-rocketing. Although demand for oil by the developing countries is depicting a rise, the total demand for oil by the US has been much higher than their combined demand since the last few decades. Hence decline in its demand leads to fall in global oil prices. Spot market: The price of crude oil is the most important factor that concerns modern thought leaders. Different streams of unrefined oil show the tendency of moving “in lockstep with each other regarding prices” (Fessler, 2011). However, the actual effect of oil prices is felt in the reaction of the consumers. Consumers react in varied ways to the prices they are required to pay for the end products that they consume. Different events, such as geopolitical phenomenon, natural disruptive occurrences or planned manmade events, like terrorist attacks, influence the spot market for oil. But since supply of and demand for the product are inelastic, any real or perceived risk might cause high volatility in price in the spot as well as the future markets. The factors mentioned above shows how different factors affect the demand and supply of oil in the world and simultaneously influence the price of oil prevailing in the international market (Institute for energy research, 2012). In this regard, since the US is a large country with respect to its consumption of oil, actions taken by the country evokes a chain of important events in the industry (US Congress, 1986). Production of crude oil in the US The Energy Information Administration (EIA) of the United States has made forecasts that level of oil production in the country would reach such a high level by the last few months of 2013 that it would exceed the quantity of crude oil that the country imports. This phenomenon has been evident since the year 1995. Import demand for oil by USA United States gets its current supply of oil from Mexico, Canada, Latin America, Saudi Arabia and West Africa. Reports from the Global Trends 2030 show that the US would produce enough oil in the coming years so as to stop importing oil from these countries (Embassy of the United States, 2012). In a span of 40 years, in 2013 for the first time, China has surpassed the United States in terms of import of crude oil. Demand for oil by USA fell considerably due to large amounts of production of oil by the states in the USA, such as, Ohio, North Dakota and Pennsylvania. These two states together produced nearly 1.5 million barrels a day. The figure has been found to be even greater than the rate export by Iran per day. Impact of these changes: Oil exporting countries A dramatic change in the quantity of production and pattern of consumption of oil all over the world is attracting the attention of experts. A dramatic increase in the production of oil by the United States might have consequences in the international scenario. As facts demonstrate, these changes would bring inevitable far reaching effects in the geo-political order in the global economy. The policy makers and intelligence analysts of the US are starting to struggle with the consequences of these changes. While such changes are capable of bringing huge amounts of benefits to the United States, they are also laden with risks and might bring dangerous consequences for the other economies in the world. At the international level more than 8 barrels of oil would become spare each day. Since the US has been a large nation in terms of demand for oil in the international market, reduction in import of the liquid by the country would affect the prices of the fuel in the international market. The OPEC would lose control over prices of oil, which would show a sharp downward trend. With drastic fall in demand, supply would be available in excess quantity and the price of oil would consequently start declining. This brings a serious and dangerous implication for the some of the countries that depend on oil exports heavily. Export of oil constitutes a significant part of the budget in these economies, due to which, any changes in the international market in the price of oil would make considerable impact on the performance of these economies. The US would be in a position to revise its foreign policies and have a greater global influence. In the coming 10 to 20 years US would earn ‘energy independence’ with a tectonic shift in import of energy (Marcellus Shale Coalition, 2012). Conclusion According to observers and analysts, in the long term, the member nations of the Organization of Petroleum Exporting Countries (OPEC) would be facing the risk of landing on an extremely risky zone. While the US would be benefitted from the increase in quantity of production and become self sufficient with respect to fuel, other member countries in the OPEC might be the most worse off. The National Intelligence Council, the think tank of the U.S. intelligence community has suggested in the report named Global Trends 2030 that the effect would be felt more seriously by these economies since high prices of energy forms the backbone of these oil exporting countries (NBC News, 2013). References Embassy of the United States. (2012). Global Trends Report Predicts Vast Changes by 2030. Retrieved from http://london.usembassy.gov/forpol361.html. Fessler, D., 2011. What Really Drives Crude Oil Prices? Retrieved from http://www.investmentu.com/2011/August/what-drives-crude-oil-prices.html. Institute for energy research, 2012. Why Are Gasoline Prices High and Rising? Retrieved from http://www.instituteforenergyresearch.org/gas/why-are-gas-prices-so-high/. Marcellus Shale Coalition. (2012). Top U.S. Intelligence Officials: Natural Gas Key to American Security, Job Growth. Retrieved from http://marcelluscoalition.org/2012/12/top-u-s-intelligence-officials-natural-gas-key-to-american-security-job-growth/. NBC News. (2013). How the US oil, gas boom could shake up global order. Retrieved from http://openchannel.nbcnews.com/_news/2013/04/01/17519026-how-the-us-oil-gas-boom-could-shake-up-global-order?lite. US Congress. (1986). U.S. oil production. Washington: Diane Publishing. Read More