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"Using a simple supply and demand framework, analyse the potential factors that impact on the price of crude oil in both the short- and long-run"
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Obviously, from the graphical illustration, more is supplied while prices are higher than when they are low.
Looking at the demand curve, on the other hand, while prices are high at p1, then quantity demanded is low at Q1. This is unlike the case where prices are lower at p2*, at which the quantity demanded rises to Q2. (investopedia.com, 2011)
Some of demand factors as well as supply may have an impact in the short-term while others will be experienced over the long-term. The latest oil price shock has been majorly attached to the demand factors as the driving force especially between the year 2004 and 2008. (Hamilton, 2008)
In the short-run there are two experiences that are evident; higher demand levels and an inelastic supply curve. This in turn causes a price upsurge as far as oil is concerned. The reasoning behind this is that as demand escalates, a decline in the stocks of oil is experienced worldwide, in all main oil refineries in the globe. The prices of oil are then forced upwards. This gives a message to the suppliers of oil in the globe to grow their production. However, a hindrance arises since it is not possible to make some extra stock supplies in the short-run. Thus, there will be an escalation of prices as demand shifts against an inelastic supply in the short-run.
As one can observe from the following graph, in the short-run some factors of supply can be varied and this leads to an increase in quantity of oil supplied. However, some of the factors that can lead to a further increase are not varied in the short-run, which causes a totally inelastic supply curve at a given point. For a better illustration to this theory, the graph below is of great essence;
Demand of oil may shift (increase) from D1 to D2 and then to D3. At the same time, prices may remain at P1 due to the fact that there is enough supply until a certain point where
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Availability of supply and cost of production may play a big part in establishing its price but not the sole determinant in pegging its price. Other factors play significantly as well. That includes government regulation, taxes imposed, result of mergers, speculation, act of nature and political instability.
Like many commodities being traded in the global market like gold, silver, rice, wheat etc. crude oil is also traded. The main reason for it being traded in the global market is that it’s one of those commodities which is unevenly distributed on the surface of earth.
The rising costs are an outcome of the general level of inflation in the countries of Europe. Many big companies, particularly those, that are conducting operations across several countries in the world are now carrying out researches aimed at weighing the probable influence of the theatrical increase in prices of crude oil on their businesses (Wilson, 1975).
The oil companies and other intermediaries participated with the embargo resulting to unheard levels of increase in world oil prices, reaching as high as four times the previous highs. Economies in industrialized countries in the world were greatly affected.
The prices of light, low-sulphur grades like American WTI and North Sea Brent grades have at times, risen much faster than those of so-called heavy crude grades that contain sulphur content. For Example, the price of Russian Urals Blend, a heavy grade has occasionally been almost 7 dollars lower per barrel than Brent.
Assuming an initial equilibrium point E1 with 49 million barrels at $57.93 per barrel, the new equilibrium position E2 is now at 51 million barrels at $58.13 per barrel. The change in equilibrium price and quantity is brought about by the shift in the demand curve D1.
due to various market frictions” (Dwyer, Fisher, Flavin & Lothian, 2005); PPP fails to hold more in short run than in long run (Amara & Murphy, 2005; Anorou, Braha & Ahmad, 2002; Culver & Papell, 1999; Caetano, Moura & Da Silva, 2004; DEUTSCHE BUNDESBANK, June 2004); “there
Being a basic commodity, food has an inelastic demand. This implies that demand for food does not correspond to prices in the ordinary sense (Shaw 630). For instance, the prices of corn, wheat, soybeans rose by 4% within the last six months. However, demand for these