The Supply and Demand Reaction of Specific Goods and Services - Enerplus - Case Study Example

Assignment, Macro and Micro Economics Introduction Microeconomics is a branch of economics that majorly highlights the problems associated with the decision-making process1. Ideally, the discipline deals with allocation of resources within the decision-making process. Microeconomics majors its objectives of research on a single unit within an individual or active market and analyze the best method to be used in maximizing the amount of profit. The discipline comprises of various theories like the producers’ behaviors theory, consumers’ behaviors theory, allocation theory, and equilibrium theory to analyze confined issues in the society. Through these theories, microeconomics aims at making clear the relationship between the behaviors and operational decisions within an organization. The essay aims at analyzing the supply and demand reaction of specific goods and services that correspond with the changes in oil prices as well as the reversal effect. The essay uses the theories of microeconomics to analyze the major concerns such as market efficiency, risk measurement, and elasticity that affect a realistic situation of capitalizing on higher market prices. More importantly, the essay draws its reference in the discussion of the microeconomic issues as outlined in the article titled ‘The Best Way to Capitalize on Higher Oil Prices’. Application of theory Microeconomics majorly relies on basic assumptions that encompass the theoretical framework. The conditions outlined by theories can often appear to be coherent, but often permit for deviations in some cases. However, the basic argument postulated by economic theories is the existence of a perfect environment for competition. The available competition indicates the existence of various trading objectives and the reality that oil prices are completely free from the intervention of the stakeholders within the market system2. However, the conditions put forward by most economic theories are always vulnerable to manipulation by external factors consisting of groups or individuals. A different assumption can also be based on the scarcity of resources as well as the objects used in the process of rational trading3. The assumption clears all the unnecessary and irrational behaviors that are exhibited within the economic environment. These behaviors may constitute activities touching on sponsorship or rather other basic forms of complimentary donation. The supply and demand model plays a major role in predicting the prices set for goods and services offered to consumers. In other competitive markets, the price for products and services can be due to the consequence of the changes in the quantity of products. The equilibrium in the economy can only be achieved when certain positions are met. In consideration of the economic theories, the quantity and price of products and services have a reciprocal effect to each other. Consequently, the maximization of utilities is developed through different mixtures involving both goods and services. It is also critical to note that the economy curve does not manifest directly on any consumptions of the earnings achieved by the major stakeholders. Instead, the supply and demand curve suggested the possible outlining of the precise decisions and tendencies made by individuals in the reserved economic conditions. A different measurement used in the supply and demand curve is the price elasticity factor4. Price elasticity is responsible for standardizing the degree of reaction in the demand of quantity against the changing prices. It also shows how variations in price impact on the quantity of goods and services produced within an economy. Ideally, it is usually important to measure the degree of increase in price against the reduction in the demand. The major reasons for the oil price change experienced by Enerplus Corporation is due to the change in demand from the consumers. According to data recorded after 2013, the Enerplus Corporation has continuously impressed the markets by gaining am estimate of 76 percent from the start of 2013 to present. An analysis of the same data indicates that the price of oil supplied by Enerplus Corporation maintains its equivalence for a relatively stable rate of supply and demand. The continuous growth rate from the statistical data indicates that Enerplus has favored the growth of investors in the oil market in a similar manner as compared to income investors. Figure 1.0 The encouraging trend depicted by Enerplus is probably occasioned by its effective production mix that plays perfectly in controlling the current and future price movements of natural gas and crude oil5. The higher prices of crude oil will possibly allow Enerplus to boost their margins in the event the costs involved remain unchanged. Also, Enerplus will probably manage to boost their margins if the costs increase at a lower rate that is quite relative to the increments in price. The success of the production mix strategies seems to be influenced greatly by the rate of global supply. The wave of uncertainty in the economy clearly indicates that the geopolitical drivers affecting the high rate of oil prices shown in the statistics will continue to persist in the future. The argument that crude oil at Enerplus will face higher and competitive prices in the long-term future draws support from even stronger factors. Since the energy sector will require a lot of money in meeting the energy needs across the world, oil prices will possibly keep moving up. Such mammoth requirements will certainly be seen in the prices of common commodities such as natural gas and crude oil. The argument is also heightened by the reality that the current high prices noted on the chart above produce margins that are still considered unattractive by Enerplus6. The producers’ margins are considered unattractive due to the increasing costs involved in challenging the geological changes. Enerplus has lately shifted most of its focus in the present year to the oil commodity due to the thinking that the prices of natural gas are expected to rise in the future. As at the beginning of 2014, the rigs in natural gas within the United States had totaled close to 372. However, the number declined close to 310 by June according to the data provided. Interestingly, the decline is a pullout from the wider trend and represents nothing for the company to worry out of the ordinary. The decline is never a threat since the natural gas rigs managed to reach a high of 900 in the late 2011, which is almost triple the current statistics. The declining number of rigs is a clear indication that lesser quantities of natural gas are being produced due to the low price environment that has developed since the start of the shale boom. The higher prices observed in the natural gas and crude oil industry represents adequate opportunities for the whole upstream segment7. Enerplus is positioned uniquely and it is possible that the company can capitalize on the situation in order to gain more profits. Enerplus expects their average daily production rate to go up within a range of 96,000 to 100,000 oil barrels if some of the properties in consideration are resolved effectively. Anticipated increased output as well as the relative high price points will definitely contribute to the development of a high margin of growth. The opportunity for growth is also strengthened by the fact that Enerplus utilizes a technique that is referred to as down spacing. Altogether, the company has also been able to cut the production costs by close to 11.1 percent since 2012 and is anticipating an additional 3 percent cut after 2014. In a bid to capitalize on the increasing prices of oil and natural gas, Enerplus has since 2011 started paying taxes by changing from being a royalty trust into a regular corporation. The decision to become a regular corporation resulted in the initial reduction of the dividends and adjusted its new realities involving the payment of taxes. However, the overall situation provides the company with a great opportunity to entice long-term investors. The opportunity to pay taxes has enticed Enerplus to place their dividends at the lowest point for them to secure a reliable cash flow. With the increasing profit margins, Enerplus will probably develop various opportunities to increase the dividends received on a continuous basis8. Apart from benefiting the company, payment of taxes will also serve as an ultimate reward for the investors. Furthermore, the share price will keep on tracking in an upwards manner and will certainly make Enerplus a popular choice for investors interested in growing incredibly. Conclusion From the data and information reviewed on the performance of Enerplus, it is evident that the price of oil will change to a higher level provided that the demand keeps increasing and the production remains at a limited level. The supply and demand model when coupled up with other basic premises and hypothesis forms a basic explanation for consumers to understand the principles of microeconomics. From a unique perspective, it is evident that microeconomics aims at analyzing the possible commercial behaviors of the seller and the buyer. From the article discussed above, the price of oil reacts to the level of demand and the production level. The case is a practical event that utilizes the microeconomic theory in the most basic manner. Notwithstanding the universal principles of microeconomics, there are several other factors that are important in deciding the prices of the oil markets. Such factors may include the depreciation of the efficiency of the USD and other issues of financial support that tend to raise the price. Recommendations / Policy Implications Most countries are currently undergoing what is termed to be am energy tax ‘loophole’. It is already common knowledge that crude oil and natural gas has changed the lives of several people in the American society and people from other parts of the world. The IRS is currently encouraging more and more investors to think about investing in the energy sector in order to stimulate growth in the energy renaissance. With such an open opportunity, investors have an opportunity to invest in some of the greatest energy companies. The basic recommendation would be for people to take up the profitable opportunity and learn the simple strategy to strike a major deal. Lastly, it is evident that Enerplus has been taking great measures which will possibly enable it to grow within the coming few years. The company should keep concentrating its efforts on the assets that are already useful and avoid wasting money on assets that might not work. If this strategy is maintained, the results will possibly reflect more in the financial statements as well as the stock price within a few quarters of production. In general, the cash flow of the company at present is in a very good condition, and it is evident that this will be maintained in the future years. It is also possible for the company to maintain its current dividend levels in the future. Bibliography Arnold, Roger A. Microeconomics. 10th ed. Mason, OH: South-Western Cengage Learning, 2011. Besanko, David, Ronald R. Braeutigam, and Michael Gibbs. Microeconomics. Hoboken, NJ: John Wiley, 2011. Dwivedi, D. N. Microeconomics: Theory And Applications. New Delhi: Pearson Education, 2006. Hall, Robert E., and Marc Lieberman.Microeconomics: principles and applications. Mason, OH: South-Western, Cengage Learning, 2010. Mankiw, Nicholas Gregory, and Mark P. Taylor. Microeconomics. Andover: Cengage Learning, 2011. McEachern, William A. Microeconomics: A Contemporary Introduction. S.l., 2007. Tucker, Irvin B. Microeconomics for Today. Mason, Ohio: South-Western, 2013. Zatzman, Gary. Sustainable Energy Pricing. Hoboken, N.J.: John Wiley & Sons, 2012. Read More