Trend in the Oil Sector - Essay Example

Krauss and Reed observe that the increase in the production and supply of oil, especially in the case of Saudi Arabia, is because domestic consumption oil within the country has increased due to a surge in the number of middle-income class of its population. This has led to annual growth in domestic consumption of 6 per cent over the last ten years. Moreover, this growth in the middle-income proportion of the population has also resulted in an increase in taste and demand for luxurious commodities.

To meet this ever-increasing demand, Krauss and Reed observe that the Saudi government has spread its refinery business to other nations such as Japan, US, etc., a factor that gives them a huge refinery network that keeps them abreast their competitors. A point to note is that despite the decline in oil prices, the country has no plans whatsoever to reduce their production in their future. This is because the country wants to maintain its market share, and if possible, even expand it, a dream that cutting on production may curtail.

Additionally, Krauss and Reed quote Husseini, a former vice president for Saudi Aramco as saying that it would be unwise second-guess market trends, hence the need to continue with the current production rate. Contextual analysis Regarding how the article relates to the course structure, the article outlines a circumstance where the supply of a product, oil, in this case, remains unaffected by a decrease in demand prices. While theoretical market dynamics in such a situation expects a correction mechanism that most likely would have been a decrease in supply in order to raise profit margins as outlined by McEachern (2012), the course is totally different.

The theoretical concepts as outlined in the course relate to a free market structure, typical of the one observed in the oil industry. Currently, the oil market is self-adjusting depending on the prevailing circumstance, not only due to internal factors but due to external factors as well. This is made evident by the fact that oil producers such as Saudi Arabia, UAE and Kuwait that have a stable government system have raised their production capacities to exploit the opportunity, (due to deficit created by decrease in amount supplied by such countries as Iran and Libya due to the instabilities in the region), to increase their marginal profits and claim larger market shares.

References Krauss, C. & Reed, S. (2015). Prices are down but Saudis keep oil flowing. The New York Times. Retrieved from http://www.nytimes.com/2015/06/01/business/energy-environment/prices-are-down-but-saudis-keep-oil-flowing.html?ref=topics McEachern, W. A. (2012). Economics: A contemporary introduction. Boston, Cengage Learning.