Demand and Supply of Oil - Case Study Example

Demand and Supply of OilDemand and supply are two key topics that underlie the very foundations of economics. The article that we would be covering in this paper is based on international oil demand and supply and was published in 14 Oct’ 14 in Bloomberg. The article talks about how international prices have been going down as a result of high supply from oil producing nations, coupled with demand which is not increasing on the same pace. The article mentions how the price of Western Texas Intermediate has dropped to its 22 week low, much in line with International Energy Agency’s forecast which determined that oil demand in 2014 would increase at its slowest pace ever since 2009.

As with any commodity, pricing is determined by demand supply dynamics, with the market price being set where demand levels equal supply levels (Rowling, 2014). As basic economics would have it, price would go up if there is excess supply of the commodity. Same is the case of oil in international markets. The United States, once the highest importer of oil, is now sitting on the largest oil reserves in the world to such a great extent that it has become an oil exporter itself. With so much excess supply and lack of demand, oil prices were bound to face an upward trajectory.

What is rather more interesting is that OPEC countries supply around 40% of the world’s oil output. Rather than curbing output in a bid to push up declining prices, Saudi Arabia, the largest contributor of oil within the OPEC, has pleaded to maintain its output levels at the same levels instead of decreasing them in a bid to capture market share. According to statistics, if production continues at the same levels from OPEC and other oil producing countries, then this would translate into a major stock-pile of oil in the first half of calendar year 2015 to 2 million barrels of oil per day (Rowling, 2014).

Again if one understands basic economics, this could mean a further slash in oil prices in the upcoming year.According to my own opinion, there needs to be a proper interaction between real demand and real supply so that an efficient price of oil could be determined. At the current levels where oil prices are going down to new lows in recent times, there is a possibility of consumers over consuming the commodity when they don’t even need to. What needs to be understood here is that oil is a depleting commodity and it has finite reserves.

One day these reserves would run out and we would be left with no alternative. Therefore, it would be best to consume them in a manner that increases the existence of this commodity.Moreover, rather than fighting for market share, OPEC countries needs to understand the importance of oil as an essential non-renewable resource and limit supply to mediocre levels. Also, it must be understood that since demand outlook in the near future does not seem to pick up pace, and with OPEC not willing to restrict output, the future of oil prices seems to be gloomy with high chances of prices further going into suppression.

ReferenceRowling, R. (2014, October 14). WTI Extends Drop From 22-Month Low as Demand Slows. Retrieved November 10, 2014, from http://www.bloomberg.com/news/2014-10-13/wti-extends-decline-from-22-month-low-as-supply-gain-seen.html