High Pump Prices: Oil Demand and Supply Factors - Essay Example

Last year, oil prices hovered at around $60-65 per barrel. With OPEC aiming to maximize its earnings, the cartel decided to reduce supply. However, oil prices continued to slide despite the supply cut. This could be explained using Graph 2 below.

Assuming an initial equilibrium price and quantity of $60 per barrel and 52 million barrels, respectively, an upward shift of the supply curve (from S1 to S2) due to the OPEC supply cut would cause an upward movement in the oil price. However, the supply shift was accompanied by a greater downward shift in the demand curve (from D1 to D2). The downtrend in demand resulted from the warmer than expected winter season in the US. With this, there is lesser demand for oil used for heating. Given the simultaneous shift in both supply and demand curves, equilibrium point E2 is reached with a lower price of $58 per barrel and a quantity of 52 million barrels.