The Oil Industry - Essay Example

The oil industry The oil industry is not a modern development. It traces back its history to ancient ages. The only problem that has necessitated changes pertains to refinery and exploitation of oil. The modern oil industry emanated from an invention by Colonel Edwin drake. It involved a steam-driven rig for drilling. This set up an expensive machine that most individuals could not be acquired. The only strategy was to harness resources for acquiring of such machines (Clo 6). The machines became more expensive to acquire as time progressed since the demand of oil necessitated very quality production. The first companies progressed to attain revenues that offset their high costs. In this sense, they became monopolies. The main reason of monopoly pertained to the fact that it was becoming difficult to attain the minimum efficient scale. The established companies were experiencing economies of scale. However, this trend stalled on the formation of unions such as oligopoly. The OPEC was composed of Middle East Asia countries and Venezuela. They emerged to form a substantial influence in the market. In spite of the fact oil was a unique product, it could be refined to several products. These products helped create companies such as shell and BP who later influenced entry of other companies. In this analysis, it is essential to focus on the level of BP and Shell in order that an accurate analysis becomes possible. However, it is vital to note that many companies are conducting oil exploration that could see the industry change to a monopolistic competition scenario. In spite of the domineering presence of unions such as OPEC, prices usually shift in response to notable factors (Clo 46). The industry has also faced notable threats as regards their continuity in the energy market. It is vital to note of the market theory in action. This involves the principles of supply and demand in conception of the same. The main factor in market theory concerns with prices in oil. Oil forms one of the most highly traded commodities in the world. This is because it is a core input in manufacturing, energy and service industries. In turn, it would be important to check on the factors of demand and supply in order to determine the short run and long-term aspects of the oil industry. There are notable factors that affect the demand of oil. To begin with, there is the concept of the cyclical demand of oil. This pertains to demand of oil that swings according to growth of economies. As economy grows, the demand of oil rises to the same. This is because oil is an essential input of many industries. It is vital to note that oil forms a core part of the production chain. The growth of economies is proportionate to growth of industries. In turn, the industries are triggered to increase production in order that the same meets the increasing demand out of surging income. A relevant example concerns with the case of China. Its demand of oil has substantially increased because of the growth in its economy. In addition, the price of substitutes is a core determination of oil’s demands. This pertains to produc5ts such as gas and coal. In the long-term strategies of many countries, they seek possible alternatives for oil. In this sense, the demand of oil would reduce. For instance, there was a demand of oil in 2004 to 2006 that led to substantial research into its possible alternatives. Additionally, change of climate serves to affect the demand of oil in the countries that experience the four seasons. This is eminent in European countries, USA and Russia. In this sense, there is high demand of oil during winter. This is because individuals require substantial energy in heating systems. For instance, there is increased demand of oil, for heating houses and work places, during fierce winters. In addition, speculative forces influences demand in distinct ways. Due to its imitable qualities, there are always speculations of rise in prices of oil. In one of the most recent instances, individuals rushed to attain hedge funds for purchase of oil future contract. This is exist in the hope that rise of prices would lead to huge profits in the future. However, the act of hedging involves risks of low prices that lead to loss of funds. In terms of supply, it is vital to note of the long-term and short-run aspects of the same. In the short-run supply to international markets, the assumption exists in the view that there is a given state of production technology. In addition, there is fixed input of capital. In this sense, oil supply is drawn from a given level of oil reserves and fixed stock capital machinery that extracts the same. As production surges to its limits, the supply curves attain inelasticity. In the short-run supply, the same faces notable factors. Top begin with, profit decisions of OPEC countries and non-member states affect the supple of oil. They can limit or expand the supply of oil as regards their revenue needs. In addition, the spare production capacities affect the supply of oil. In case of large capacities, the production of oil would surge to increase the supply of the same. Logically, the level of stocks would affect short-run supply because higher stocks suggest larger supplies. Lastly, external shocks such as terrorist attacks would reduce short-run supply of oil to international markets. In terms of long-term perspective, oil reserves would affect its supply. Depletion of reserves would cut down on the supply of oil. It is vital to note that future oil supply would depend on oil exploration. In addition, technology is a core factor in influencing supply of oil. In this sense, technological change, that increases efficiency, would help in improving the supply of oil. It is vital to note that the interaction of supply and demand curves in the short-run reveals interesting results. In case of inelastic supply, higher demand of oil pushes up the prices. This is because an increase in demand serves to reduce oil reserves. Reduction, in oil reserves, serves to increase prices. In the short-run production curve, the amount of oil would increase as time progresses because of limited depletion. There is low likelihood of depletion because supply meets adequate demand. In the long run, the depletion of oil would set in thereby decreasing the production of oil. In addition, technology would turn obsolete in extracting oil thereby reducing the production of the same. It is vital to note that costs would reduce in the short-run period because production of oil would serve to offset its costs through substantial revenues. In the long run curve, the costs of oil production would increase since the extraction of oil would become difficult. Work cited Clô, Alberto. Oil Economics and policy. Norwell, MA: Springer, 2000. Print. Read More