The Real Price of Oil - Assignment Example

Economy Name Lecturer Topic Date PART A CALCULATION DATE average price CPI Deflator Average oil price (real) 1947 1.84 22.3 0.114347 16.10009 1948 2.57 24.0 0.123118 20.87424 1949 2.57 23.8 0.12191 21.08115 1950 2.57 24.1 0.12321 20.85862 1951 2.57 26.0 0.13299 19.32472 1952 2.57 26.6 0.136032 18.89265 1953 2.72 26.8 0.137061 19.816 1954 2.82 26.9 0.137558 20.5005 1955 2.82 26.8 0.137204 20.55329 1956 2.82 27.2 0.139227 20.25472 1957 3.04 28.1 0.143948 21.13961 1958 3.06 28.9 0.14788 20.6789 1959 2.98 29.2 0.149258 19.93199 1960 2.97 29.6 0.151485 19.60592 1961 2.97 29.9 0.153108 19.39807 1962 2.97 30.3 0.154905 19.17301 1963 2.97 30.6 0.156851 18.93517 1964 2.95 31.0 0.158925 18.53078 1965 2.92 31.5 0.161434 18.08792 1966 2.94 32.5 0.166262 17.66487 1967 3.03 33.4 0.170891 17.71305 1968 3.07 34.8 0.178146 17.23301 1969 3.30 36.7 0.187829 17.54255 1970 3.35 38.8 0.198884 16.84904 1971 3.56 40.5 0.207286 17.17432 1972 3.56 41.8 0.214071 16.63002 1973 3.87 44.4 0.227471 17.02638 1974 10.37 49.3 0.252519 41.07806 1975 11.16 53.8 0.275602 40.49323 1976 12.65 56.9 0.291516 43.37675 1977 14.30 60.6 0.310379 46.05983 1978 14.85 65.2 0.33406 44.45304 1979 22.40 72.6 0.371649 60.28273 1980 37.38 82.4 0.421828 88.60247 1981 36.67 90.9 0.465607 78.751 1982 33.64 96.5 0.494281 68.05042 1983 30.40 99.6 0.509898 59.61001 1984 29.28 103.9 0.532171 55.01239 1985 27.97 107.6 0.550947 50.77255 1986 15.04 109.7 0.561659 26.77781 1987 19.16 113.6 0.581756 32.93819 1988 15.96 118.3 0.605607 26.35373 1989 19.59 123.9 0.634624 30.87026 1990 24.49 130.7 0.669012 36.61072 1991 21.48 136.2 0.69722 30.80952 1992 20.56 140.3 0.718423 28.61963 1993 18.46 144.5 0.739759 24.95136 1994 17.19 148.2 0.758961 22.64413 1995 18.43 152.4 0.780251 23.61804 1996 22.15 156.9 0.803164 27.5834 1997 20.60 160.5 0.821941 25.06142 1998 14.39 163.0 0.834654 17.23827 1999 19.25 166.6 0.85296 22.57082 2000 30.30 172.2 0.881679 34.36396 2001 25.92 177.0 0.906513 28.59749 2002 26.10 179.9 0.920978 28.33727 2003 31.14 184.0 0.94214 33.0524 2004 41.44 188.9 0.967271 42.84012 2005 56.47 195.3 1 56.466 2006 66.10 201.6 1.032043 64.05063 2007 72.36 207.3 1.061633 68.16195 2008 99.57 215.3 1.102156 90.33933 2009 61.69 214.5 1.098556 56.15826 2010 79.43 218.1 1.116636 71.13151 PART B Factors that determines the global supply and demand for oil in the short and the long-run The price changes of the crude oil have a far-reaching effect in the international oil trade. The principle of supply and demand analysis is a way of understanding the interconnection between the macroeconomic consequences and macroeconomic of the oil market. Globally oil is the most heavily traded commodities and its price fluctuation have important effect for oil exporters, producers and many nation that depend on oil as a key input in their manufacturing, energy and service industry. There are several factors that determine global supply and demand for oil in long run and short run. Demand On the demand side there is cyclical demand. This is the link between the rate of global economic growth and the demand for oil. This link simply exists because oil is essential input into many industries. The demand for oil rises when the economy expands. This can be demonstrated in the case of Chinese economy. The fast growth in its output in the energy intensive sector led to serge in the demand of crude oil into the Chinese economy. The price of substitutes is also one of the major factors that determine demand. The price of oil substitute relatively affects the demand for crude oil for example the market price of a gas. The development of reliable and relatively cheaper substitute in the longer term, shift the demand of away from crude oil towards the emerging substitutes. A shift on the demand of oil was seen in the year 2004-2006 when the prices of oil was higher. Researchers dives non-oil substitutes in an attempt to curb the rising oil prices. The problem with alternative source of energy is that it takes several years to come through to affect the market for energy. Another factor that effect demand is change in climate. The demand for oil during winter is very high. Crude oil is use for heating work place system and households in Canada and USA economies. Market speculation is also another that determines demand for oil. Price speculation characterizes the oil market where by purchasers hope for a rise in prices on the world market. This can be seen in the most recent spike in the oil prices where it feature high level of demand by hedge funds and other investors pouring into the international petroleum exchanges to buy up any surplus oil future contracts. Investors hope that by the time the contracts are ready to be fulfilled, they would have made a huge profit. However, it is important also to appreciate the fact that speculation is characterized by risk since prices can go down as well as up. Supply A good analysis of global supply of oil can be made by distinctions between long term and short-term supply to the international markets. The supply curve for the short run is normally drawn on the basis of a given state fixed use of capital inputs and production technology and fixed use of capital inputs. For example the oil industry supplying a given stock of capital uses machinery to extract that oil from a known level of oil reserves. Short-run supply The daily supply of oil is characterized by inevitably short-run limit as production gets close to capacity limits, so the short run supply of oil is more inelastic. There are a series of different factors that determines supply of crude oil in the short-run. Among this factors are profit motive, space capacity, stocks and external shocks. The OPEC countries came together with an ultimate objective to control a profitable price for the crude oil. Their corporations have had a huge impact on the global supply of oil. When they feel that the prices are not profitable they hoard the oil product which leads to increase in the prices. Stock level is another major factor that influences supply of oil. Major oil refineries are prone to held high current level of oil stock (inventories) for immediate supply. This high level of stock translates to extra oil supply when it is release on to the market quickly when the demands fluctuate. External shocks are also another major factor that influences supply of oil. A good example is the loss of output from rig disruption or closure of oil supply due to terrorist attacks or during war outbreak. Long-run supply On the long-run factors such as reserves, technology and exploration affect supply of oil. The depletion of proven oil reserves is at higher increase due to faster growing demand. The supply of oil in future is under treat if the recent is anything to go by. Similarly exploration is way to curve anticipated future shortage of oil. It has made a lot of sense for many nations to invest in exploring, identifying and exploiting new oil reserves. This factor together with enforceability of the future as resulted in mass hunting of oil. The exploration of the new reserves means additional supply of oil in the market. Technology on the other hand as factor that determines the supply of oil has played a major role in oil extraction. It has impacted in on the cost of production, refining and extraction. More efficient in extraction, refining and extraction has advance ways in which oil is produce, process and transport. With the emergence of new technology it has been accompanied with an increase in supply of oil. View of the real oil price 2020 The oil prices will be greater than $200 in 2020. This can be demonstrated through a number of situations that surround production of oil. There have been a consistent drought patterns reduces the flow of major river systems across the world. If the latest patterns of climate are anything to go by there is a serious decline in the output of hydroelectric power. This factor alone will magnify the demand of oil and it will result in the rise of prices to $200 by 2020. A good illustration about this can be seen in the case of China. It has suffered from one of its worst droughts ever. This led to a significant decline in hydropower and severe electricity shortages throughout much of central China. This made china to shift to burning more coal to generate electricity and the use of oil. Since then the demand oil has been ever increasing and domestic mines no longer satisfy the country's needs, China has become a major coal importer and this move is characterized by continuous escalating prices. Similarly industries are relying more on diesel-powered backup generators, putting yet more pressure on global fuel prices. In the light of the above discussion it possible that the price of oil in 2020 can rise to $200. References: John Tierney (2010). Economic Optimism.Yes, I’ll Take that Bet. New York Times, 27 John Tierney (1990) ‘Betting on the Planet,’ New York Times, 2 December December 2010. Peter Maass (2005). The Breaking Point. New York Times, 21 August 2005. John Tierney (2005). The $10,000 Question. New York Times, 23 August 2005 . Read More