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High Pump Prices Oil Demand and Supply Factors - Essay Example

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In a recent Reuters article by Richard Valdmanis (2007), it is noted that crude price has risen by $0.23. With this, equilibrium price of crude, the primary raw material for gasoline, has increased to $58.16 per barrel this week. As the fundamental supply and demand balance remains the key determinant of the new equilibrium price and quantity in the petroleum market, the price increase could be better explained by Graph 1 below.
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High Pump Prices Oil Demand and Supply Factors
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Download file to see previous pages The upward shift in the demand curve (D1 to D2) results from the increase in crude demand due to seasonal factors. As cited in the article, February is commonly slated for refinery maintenance. As such, decline in gasoline stockpiles occurs with refinery production slowing down. Ceteris paribus, a higher equilibrium point E2 is seen.
The above graph also exhibits no shift in the supply curve S. This assumption is derived from the advisory of the Organization of Petroleum Exporting Countries (OPEC), a powerful cartel of major oil producers, that they would keep current output restrictions in place. In this regard, no additional supply may be expected to offset the increase in demand, thus, increasing crude price.
Another case of supply and demand schedules interesting to analyze is the declining oil prices in the world market at the onset of 2007 (Ghatous 2007). Last year, oil price hovered at around $60-65 per barrel. With OPEC aiming to maximize its earnings, the cartel decided to reduce supply. However, oil price 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 quantity of 52 million barrels.
Ghatous, G. (2007). "OPEC concerned about price, to act if needed". Reuters. Accessed: 14 March 2007 from
Valdmanis, R. (2007). "Oil rises on US fuel draw, eyes on OPEC". Reuters. Accessed: 14 March 2007 from
Samuelson, P.A. and W.D. Nordhaus. (2001). Economics 17th Ed. McGraw-Hill.
Sayre, J.E. and A.J. Morris. (2004). Principles of Microeconomics 4th Ed. ...Download file to see next pagesRead More
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