Factors Paramount to the Demand and Supply Curve of the Oil Market - Term Paper Example

FACTORS AFFECTING SUPPLY AND DEMAND OF OIL AT RETAIL LEVEL By Student’s Name Course code and name Professor’s name University name City, State Date of submission Introduction The demand and supply of oil at the retail level is affected by a multitude of forces that cannot be depicted significantly. The supply of commodities is affected by demand and vice versa thus oil is not an exception when it comes to the laws of economics. A growth of oil demand in many areas locally and internationally translates to upward pressure in prices. The service station operators follow keenly on the international fluctuations in market behaviours of this precious commodity in order to develop a good relationship with their customers. This is because the oil business industry is competitive and increase in prices while disregarding the other competitors can bring a business to its knees. At times gas stations operators have been forced to reduce prices in order to retain their clientele. Chevron Corporation (2013) a fuel mogul in their article The Price of Fuel states that “If a retailer loses enough volume, the retailer may then reduce prices in order to retain its customers.” This and other factors are real movers in the fuel business especially with the nature of competition in the industry that is obviously regulated by one market capitalist Organization of the Petroleum Exporting Countries (OPEC) whose major objective is to coordinate the policies. The competition among retailers in any city in the globe can be a contributory factor in the supply and demand of oil. It is also notable that while fuel oil is sourced from one supply point, retailer in the same street might decide to fix their own prices based on the need for market supremacy. Oil business is also seen as a lucrative venture since the market demanding is always on an increase. This has prompted magnates in oil business to open more gas stations in order to corner the revenue from escaping their precincts. It is also important to bear in mind that as much as major brands dominate the market, they are usually operated by individual dealerships that are given the freedom to determine their own prices by the mother company. Factors Affecting Supply and Demand of Oil at Retail Level in Deptford Deptford is a busy district found in the south east of London and neighbours River Thames to the south. Industry and transport in this district are the prime businesses that are undertaken in day to day ventures. As a former ship building town, Deptford has grown a robust economy and demography to what it is today. Deptford is now accessible via an enhanced transport system that comprises of rail, road and water transport. The main road transport routes are Evelyn Street and Creek Road which are A200 classified (Royal Geographical Society 2012). The city is proliferated with oil retail business with major companies such as Exxon Mobil Park, Chevron Oil Company, Esso, Shell and Barton Petroleum taking a lead. A random search on www.google.com results to more than 10 oil retail stations. Considering the population in the area, these are way too many petrol stations, a fact that can result into a cut neck kind of competition. Figure 1: Comparison of the national average retail price of gasoline and the price of crude oil (Chevron Corporation 2013). Since it is now clear that other hydrocarbon energy sources such as coal are coming to extinction in their use in the local market and industry, the demand is certainly going up for cleaner energy as set by the world movements on climate change. People have resorted to energy sources such as natural gas, nuclear energy and renewable energy sources which include solar, wind, bio fuels and the hydroelectric power. This does not however provide solutions for the users of the automotive engine thus this problem is left unsolved. The use of oil as the main energy source for the automotive engine has continued to raise concerns especially with this diminishing commodity. Local and international supply prices have fallen for this trap as they are all controlled from one centre or by a few countries that purport to be the world leaders in oil (Holditch and Chianelli 2008). The demand and supply of oil in Deptford can be judged from the world market trends. This is based on other dynamics of the oil market as established by experts in this sector. These factors are discussed in depth in the text that follows even as the experts forecast that the demand shall shoot uniformly by a whopping 60% across the world cities, Deptford not an exception. According to Holditch and Chianelli (2008) “One clear picture from the NPC study is that the demand for energy will increase by 50–60% between now and 2030 as a result of increases in global population and the desire to increase the standard of living, especially in developing countries”. The demand for oil in the retail centres in Deptford has therefore seen an increase due to population lapses that have been seen in all manner of aspects. The Population may not be increasing directly but the proliferation in tourism and other activities of national importance have ensured this (Holditch and Chianelli 2008). In order to understand the dynamics of supply and demand at the retail level in Deptford, it is important to first understand how the components of crude oil. Gasoline is one of the most demanded products of crude oil and fortunately, this product is found in abundant in comparison to the others as shown in the illustration below. This entirely depends on the effectiveness of the refining plant. The availability of gasoline shall entirely depend on this factor in determining the prices of local and international retail. Gasoline as the most demanded and most available product has been manufactured to suit as many engines as possible since it is one of the cleanest hydrocarbon energy sources. Most of the clients in the Deptford market have an inclination to this product just the same way other world markets do. The amount of gasoline available for gasoline shall be affected by the type of crude oil; either light or heavy that is landed for refinery to the local market. As Holditch & Chianelli (2008) put it "… amount of gasoline produced also depends on the quality of crude oil: light crude oil, which is generally low in sulphur, can yield more gasoline than heavy crude oil, which tends to be high in sulphur." Figure 2: A standard production pie graph of one barrel of crude oil (Holditch and Chianelli 2008). Since the supply is entirely depended on the production, the means through which the petroleum products reach the clients are also to be considered in the supply abilities of a certain retail base. A process that begins as a complex procedure ends up in another complex web of affairs that is fully controlled by individual transport markets. In order for petroleum products to reach customers at the retail outlets there are a lot of regulations to be followed by the transporters. These may sometimes be frustrating thereby affecting the demand supply curve of the local oil retail outlets. Factoring in the transport mechanism affects the supply significantly as a local affair (Holditch and Chianelli 2008). The market price of oil is controlled by one international organisation OPEC in which Nymex in New York and the ICE Futures in London largely feature. The prices are usually held culpable for the demand of a commodity both at local and international levels. Most people resort to public transport when the price of this important commodity shoots up due to market speculation. According to Engdahl (2008) "The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil." Clients cannot therefore hoard this commodity as the speculated prices hit an all-time high. It shall be noted that even when the prices go up, the clients continue buying the commodity although in less numbers. When a shortage hits the market due to international price standoffs customers in Deptford have been found to buy this important commodity. As much as the debate is not about what does not affect the demand of oil in Deptford, it is important to look into the price factor with the importance it deserves. Figure 3: The projected future demand of oil (Holditch and Chianelli 2008) A notable point from Engdahl (2008) goes, "With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices." The unregulated market dealings in oil have affected the supply to the customers since the entrepreneurs hold with their stock to observe the eruption of chaos among the oil producing nations. The speculations result to high market prices which are in often cases shouldered by the customers. When such events as speculation continue rising the retail points are likely to hoard in order to sell when demand is too high. During these times it is automatic that any price set by the service stations though at competitive rates with regard to the locals will sell the commodity. The prevailing market rates at some point affect the demand although not significant during the good economic periods. Reports have been published to point out at the commodity futures in order to ensure consumer protection. This however does not seem to hold as things have always gone awry when governments deep their feet into the oil issue. Deptford has in the recent past experienced the wrath of oil price speculation that has faced the entire world market. With this effect Engdahl (2008) states that, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.” This exposes customers to unnecessary spend on oil reserves which could have been otherwise applied in some other expenditures. All in all speculation affects the demand of oil in a positive manner as a counter effect for the forecast shortages in the future. The Intercontinental Exchange, ICE Futures exchange in London establishes itself as an internally controlled organ responsible for the oil exchange rate data. Most customers and retail suppliers have been able to access real time data since the inception of the exchange centre in 2005. The effects of this data has been felt in Deptford with most of the customers responding to the market prices in a manner suggesting that they closely follow these happenings. This may affect the demand of oil either negatively or positively. When the ICE futures exchange, London posts good reports that favour the prices, the demand shall be normal. Once the fluctuations begin, the customer's demand increases as market stimuli is expected by all the key players. This is also seen as manipulation of customers towards exhausting this commodity's stocks from the reservoirs (Saefong and Mozee 2013). Apart from the laws of supply and demand, external forces have been found to exert pressure into the oil retail business. International unrest in the Middle East in particular has instilled fear among the local fuel suppliers with a grim hope for successful ventures. This means that every time war erupts in the Middle East or sanctions are placed against certain fuel supplying nations, retailers in Deptford shall also have to shoulder the pain of losing clients due to low supplies. A good example is the unrest that has been seen in Bahrain and Gulf areas in the Middle East which are responsible for up to 30% of total fuel supplies across the world. The fact is that when world fuel supplies diminish even the local retailers are affected by the painful fact that they shall also lose opportunities to supply their clients. Customers on the other side have to forego the demand and economize during these hard times while hypothesizing on when the shortage shall be over. World oil politics are seen as the major external constraint to the oil demand and supply curve as the major it affects the prices from time to time. The oil prices have always retreated from the peak performance as some of the countries set in to offset the major deficits that are left from the conflicts that emerge internationally (Brega, London and Washington, DC 2011). Further down the line Brega, London and Washington, DC 2011 also indicate that the reason why the traders are so nervous is because of “the long-term trends of supply and demand which were already unfavourable when the Arab shoe-throwers intervened. Before the uprisings, a barrel of Brent crude was commanding close to $100 a barrel.” This explains why the supply of oil may diminish at the local level when the diplomacy stunts by the governments responsible for international peace fail. As much as recovery occurs at some point, it does the damage by creating a virtual supply void that needs to be filled by the rich industrialized nation. In a bid to fill the reservoirs the locals are forced to wait for the stabilization of the prices before they can embark on consuming their normal amounts. At times customers may be forced to take a certain fixed amounts of oil if the levels of supply are low than the speculated amounts (Brega, London and Washington, DC 2011). Economic growth in third world countries have also been blamed for the shortage of oil in the local markets of Deptford. This means that instead of the market suppliers concentrating on satisfying the current clients, they are looking at new prospects which however does not reflect that much. Looking back at the periods that have reported the highest growth in the third world economy, the supply has also been significantly affected. Panorama (2009) phrases it this way; “Due to the accelerated pace of this uptrend, supply could not keep up and price hikes occurred to alleviate tension on the market. This is what is known as the destruction of potential demand. Increasing the price destroys a portion of demand, which can then adjust to supply.” (Alazard-Toux and Maisonnier 2009). The competition for oil commodity also has continued growing significantly in the local Deptford market suppliers as shortages crises have hit the world market. This has forced the situations whereby surpluses are available to decrease in the country’s oil reservoirs. Conditions whereby oil has gone from surplus to tight market conditions have been reported in recent times forcing the demand supply curve to have discrepancies although the normalization effect is felt sooner than it can be realized. In other cases the US Dollar has affected diversely the cost of this precious and high demand commodity. The US Dollar with which most countries transact with for the purposes of harmony has affected the demand and supply curve although this effect might not be widely felt in the Deptford Market (Alazard-Toux and Maisonnier 2009). Conclusion The essay has managed to cover some of the factors that are paramount to the demand and supply curve of the oil market at the local level. Deptford in particular has experienced fluctuations in demand and supply due to the factors arising from production by the Organization of Petroleum Exporting Countries (OPEC) consortium which is responsible for a large share of fuel. The supply from non-OPEC countries have also affected the surplus levels rendering these countries to be referred as price takers. The price takers have eventually affected the supply to the local markets of Deptford. The competition amongst the top economies and local suppliers of the commodity has also had a diverse effect on the demand-supply relationship. References List Alazard-Toux, Nathalie, and Guy Maisonnier. Panorama 2009: Oil supply and demand. Research, Rueil-Malmaison Cedex: Innovation Energy Environment (IFP), 2009. Brega, London and Washington, DC. A complex chain of cause and effect links the Arab world’s turmoil to the health of the world economy . 2011. http://www.economist.com/node/18285768 (accessed May 06, 2013). Chevron Corporation. The Price of Fuel. 2013. http://www.thepriceoffuel.com/whataffectsfuelpricing/ (accessed May 1, 2013). Engdahl, William F. ‘Perhaps 60% of today’s oil price is pure speculation’. 2008. http://www.globalresearch.ca/perhaps-60-of-today-s-oil-price-is-pure-speculation/8878 (accessed May 2, 2013). Holditch, Stephen A., and Russell R. Chianelli. "Factors That Will Influence Oil and Gas Supply and Demand in the 21st Century." MRS Bulletin 33 (2008): 317-326. Royal Geographical Society. District 45: A self Guided Walk in London's Deptford. London: The Royal Geographical Society with the Institute of British Geographers, 2012. Saefong, Myra P., and Carla Mozee. Oil futures log third straight session gain: MidEast tension raises supply concern; natural-gas prices fall. 2013. http://www.marketwatch.com/story/oil-prices-extend-rally-trade-above-96-2013-05-06 (accessed May 06, 2013). Read More