Determinants of Demand and Supply of Crude Oil - Essay Example

Crude Oil Introduction Demand refers to the prices at which consumers are willing to purchase a product or service. Product/service demand may be influenced by some factors. Some of these factors may include the taste of the product, the income earned by the consumer and seasonal changes. The quantity demanded of a particular product increases when the prices are low, on the hand, we the prices are increased the quantity demanded decreases. The behaviour demonstrates the application of the law of demand (Whelan and Msefer, 1996). Demand curve Prices Quantity demanded Source: Economic Demand and Supply Definition of supply It refers to the willingness of the supplier to produce goods and services needed in the market. When the quantity of goods or services required satisfying consumers, producers would be willing to meet the deficiency at higher prices. He reason is that producers are always looking for such opportunities to make a kill. Conversely, when the prices of a commodity decrease the suppliers will provide fewer quantities to avoid incurring losses brought about by leftover. Supply curve Price Source: Economics Supply and Demand The interaction between the demand curve and the supply curve creates an equilibrium point. An equilibrium point is a point in which the quantity demanded of a product equals the quantity supplied with the levels of prices being the same. Determinants of demand and supply of crude oil The demand and supply of crude oil over the last ten years has been influenced by numerous factors. For the last ten years, Crude oil prices had continued to escalate. However, the trend has been interesting because in some cases the prices have been fluctuating. The major cause of the increase is attributed to the higher crude oil cost that is currently being witnessed. The cost of producing crude oil has risen due to the rising political temperatures in oil producing countries (Caltex, 2014). Countries such as Nigeria, a major oil producer, have continued to witness political violence caused by militia groups. The political turmoil in the country has worsened the already deteriorated security levels. The corporation has been facing major security challenges that are based in the country, a factor that has made the cost of the production shoot up (Shell, 2012). The supply of crude oil is by the uncertainty that surrounds the oil industry. Crude oil that is the major product that produces other petroleum products affects the prices of those products. The prices of oil have a direct correlation with the prices of the petroleum products which are as fuel. The demand fuel has risen over the years making it necessary for oil producing countries to adjust the prices accordingly (Caltex, 2014). Countries have continued to witness increased Gross Domestic Product over the last ten years. The enhanced economic levels of the countries have fuelled the demand crude oil. Consequently, the income levels have increased because of improved economies implying that the purchasing power of consumers of oil product has risen. Demand for crude oil high in countries that are not endowed with the resource because it one of the primary economic drivers. Research indicates that the trend is likely to persist in the coming years. It is that the demand level will grow by 44% globally by the year 2030.Measures to cushion consumer from the anticipated growth have not been taken because low levels of crude oil are stored for future use. The market has failed to attain an equilibrium point because the demand for oil outstrips the supply levels required by many countries. According to the U.S. energy agency, improved economies have contributed to the skyrocketing of crude oil prices in the recent times. The American agency predicts that the by 2030 the demand would have grown by a margin of 73%.The main contributor of his growth is the improved economic development of many countries (Caltex, 2014). Hence, the demand and supply of crude oil is influenced by changes in the aggregate services and goods produced in a nation per a given certain period (Mostert, 2005). Estimated GDPs in the coming years %per annum 2014 2015 2016 2017 2018 2019 OECD 1.7 2.0 2.22 2.3 2.3 2.3 Developing countries 5.1 5.2 5.4 5.4. 5.4 5.4 Eurasia 1.2 2.0 2.9 3.1 3.1 3.0 World 3.1 3.4 3.6 3.7 3.8 3.8 Source: OPEC Technological changes have had significant implications on the demand and supply of crude oil. Advancement in technology has brought about new effective and efficient methods of production of crude oil. The cost of exploring new oil reverses has been greatly reduced. Tremendous changes have been achieved in the drilling process due to technological changes. A major milestone has been able to be in accessing oil reservoirs which were difficult to navigate initially. Supply of crude oil has increased due to the technological advancement that has been witnessed for the last ten years. On the other hand, technological changes have had a negative effect on the demand for crude oil. It has been established that technological changes negatively affects the demand for petroleum products because consumers are given alternative sources of energy to use. Technology aims at reducing the cost of energy by developing other cheaper and affordable sources of energy that are readily accepted by consumers. Emergence of new energy sources such as the use of bio-fuels has made a demand for crude oil to decline in certain regions. However, it has been established that technology can also cause the demand for crude oil to increase especially in the automobile industry. The automobile industry has become very competitive and, as a result, manufacturers have been implementing projects that are aimed to develop advanced vehicle. Some of the vehicles consume many fuels, which has increased the demand for crude oil that is refined to petroleum products (Mostert, 2005). Environmental changes and the introduction of new policies and regulations have adversely affected the demand and supply of crude oil globally. Countries have developed new framework to guide the sector, and new strict rules have been implemented. Companies involved in oil exploration and processing are charged heavy penalties if they fail to oblige with new rules and regulations that are at protecting the environment. Such challenges may force the companies to pass the charges to their consumers. When the prices of oil products are exorbitant, crude oil demand is more susceptible to decline (Holditch and Chianeli, 2008). Powerful cartels exist in the oil industry and influence the prices of crude oil. They set prices that have a direct impact on the demand and supply of crude oil. The cartels are of countries that produce oil and review the prices from time to time in their favour. Organization for Petroleum Exporting Countries (OPEC) has been accused of short-changing other oil producing countries by trying to dictate oil prices. Consequently, the move affects the pricing of crude oil because other producers do not have the independence to set competitive oil prices thus the supply they are willing to produce becomes compromised (Mostert, 2005). The supply of crude oil is also affected with the discovery of new oil reservoirs. Cost incurred in producing additional units of oil that is for the market has been on the rise because the exhaustion of cheap oil necessitates the come up with other effective and efficient methods of producing oil. Changes in technology make it possible for oil companies to reduce their cost levels remarkably hence promoting supply. It is also is asserted that the OPEC determines oil supply across the globe. Such determination is because other suppliers are will be unable to meet the escalating demand for crude oil in the future. Oil reservoirs in the world continue to be depleted implying that the oil levels continue to diminish. Although oil levels are expected to rise due to huge investments made in oil exploration, a time will come where the oil deposits will be completely be exhausted. The decline in oil deposits will cause the supply of crude oil to reduce making it impossible to meet the demand in the market (Mostert, 2005). In the transport, the number of passengers who use public transport continues to increase daily especially in developing countries. Passengers Increase is caused by the population explosion globally. Many people will invest in the industry due to the lucrative returns the industry offers and the effect will be consumption levels of petroleum products. Suppliers will increase their levels of production by investing in more production of oil (OPEC, 2014). In above connection, the supply and demand of crude oil are influenced by other vagaries such as tax regimes, action of competitors, government legislation, foreign trade, and demographic factors. The pricing strategies of competitors greatly affect demand and supply of crude oil. Therefore, it is a challenging task to forecast with certainty on how the oil industry will be in the future. Experts in the field propose that the body to regulate the industry should be in order to stabilize the forces of demand and supply. Caltex, which is one of the companies that has invested in the sector, has put measures to ensure that its supply is uninterruptable. In order for sanity to be in the industry, companies must invest in an effort the amount of crude oil being produce to meet the deficiency (Caltex, 2014). Reference list Caltex, (2014).Determining fuel prices. [20.11.2014]. . Holditch, A.S and Chianeli, R.R, (2008).Factors that will Influence Oil and Gas Supply and Demand in the 21st Century. [20.11.2014]. Mostert, W. (2005).Factors influencing Price of Oil in the Medium to Long-term. [20.11.2014]. OPEC, (2014).2014 World Oil Outlook. [20.11.2014]. Shell, (2012).Building an Energy Future: Annual Report. [20.1.2014]. Whelan, J and Mesmer, K. (1996).Economic Demand and Supply. [20.11.2014]. Read More