Supply and Demand - Essay Example

Teacher Article: U.S. Oil Prices Drop Below $75 a Barrel The article from Wall Street Journal en d “U.S. Oil Prices Drop Below $75 a Barrel“ is a classic example of how the law of supply and demand affects prices. The product of discussion is crude oil with its price tumbling belong $75 which is historic in more than four years. The reason for the decline in price of crude oil is the “Growing U.S. production, coupled with reduced demand, is [the] key reason oil prices have slumped more than 30% since mid-June” (Friedman, 2014).

The growing production in the US is due to the increase production of shale drilling of roughly 60% in the last five years as technology improved and enabled produces to access supplies trapped in shale-oil fields. This is coupled by a reduced demand for crude oil in the US due to the increasing awareness and use of alternative source of energy put exerted a downward pressure on the price of oil. The law of supply and demand states that if demand declines or remains the same but the supply increases, the tendency of the price will go down.

The reverse also applies with prices going up if demand increases and supplies go down. In our case however, the growing output of shale production in the US meant that supplies are now greater making the price of crude oil cheaper. This will have a ripple effect in the economy as crude oil is considered as a production output. The difference in price of crude will be felt in the products of companies.ReferenceFriedman, N. (2014, November 13). Retrieved November 20, 2014, from http://online.wsj.com/articles/crude-oil-sinks-below-80-barrel-despite-saudi-oil-minister-comments-1415878901