ECO201: Micro Enconimics Mod 3 CBT - Essay Example

Oil prices have been constantly on a high. With oil being around US $50 per barrel in September 2004, oil prices broke through $142 per barrel on June 28, 2008. (Wikipedia, n.d.) Everyone has their own reasons for the rising oil prices. Some say its manipulation, speculation, falling dollar, threat of war while economists simply stick to the demand and supply theory for explanation. In 1970’s when the oil prices were up suddenly and sharply, the price change was attributed to short supply. Back then demand for oil didn’t change much.

But because of wars there were huge disruptions in supply. On the contrary, in the current situation oil prices aren’t about supply. Although when in September 2007 crude oil prices crossed $80 a barrel, it was related to the issue of OPEC announcing an output increase lesser than expected and six pipelines were attacked by a leftist group in Mexico.(Wikipedia, n.d.) Currently there were no such disruptions in the supplies whether deliberately or due to any other unintentional factors. World’s oil supply is highly concentrated in OPEC countries and they are running close to their full capacities.

(Webb, 2005) Demand is altogether different from the supply situation at present. It is rising inexorably. And it is not the rising demand from the developed west but the soaring demand from the developing part of the world. China now consumes 30% of the world’s oil. (Webb, 2005) Oil consumption in India, Middle East, Thailand, Vietnam, and Russia is rising relentlessly. Oppressive Chinese economic growth and breakneck pace of Indian economic expansion with huge rise in industrial output, richer citizens increasingly demanding more and more cars, air conditioners, refrigerators and energy is rapidly changing the oil demand map.

The demand is unstoppable unless these countries stop growing and the citizens of these countries forsake their dreams. According to the predictions of International Energy Agency, in 2008 the global demand for petroleum products would grow by 800,000 barrels a day. (Ganapolsky, 2004) Although world oil production is at an all-time high, but so is the demand. There is no more supply, but there is more and more demand. Economists suggest that as oil market price is determined by global supply and demand, the not rising supply and the continuously rising demand would only mean that the high prices are here to stay.

The supply and price also depends on people’s expectations about future supply and demand. (Surowiecki, 2008) The possible armed conflict between Iran and Israel potentially disrupting oil supplies, cautioning report of International Energy Agency stating that crude supplies are unlikely to ease, increasing demand from developing countries are factors raising concerns about tighter scarcer future supply. (Associated Press, 2008) This would mean that oil producers leave it in the ground and sell it later or ask for very high prices to pump their oil.

(Surowiecki, 2008) While some economists suggest a further increase in price, the others suggest that the prices will decline in long term. They propose the theory of inelastic demand as a reason for this, which means that people cannot promptly reduce the consumption of oil due to sharp rise of prices. (Andrews, 2007) This means that though not immediately but eventually the demand will slacken. Some efforts are already being made in response to the price rise. Americans are buying less gas, General Motors is closing four North American plants, Southwest Airlines if flying slower to save fuel and businesses are restricting travel thereby opting for teleconferencing.

(Associated Press, 2008c) Similarly, on the supply side the spare capacity and inventories point toward a very inelastic short-run oil supply. However new fields are still being discovered and eventually if not soon they will be operational. In addition with technological developments cheap and easy oil extraction is becoming possible. (Gier, 2008) Also Iraq hopes to raise its production to 4.5 million by 2013 i.e. an addition of 1.5 million barrels of oil each day to the world’s supply (Associated Press, 2008b) This suggests that although short run demand and supply are very inelastic will result in highly volatile prices in the near future, but in the long run the prices would ease.

There are a wide variety of economic perspectives on oil prices as mentioned above. However the perception that the prices of crude oil will relax in future is very convincing. Energy conservation efforts are being made all around the world. Continuous technological developments will help in the location of new fields, the extraction of oil faster, cheaper and easier and substitutes to crude oil. These and other factors will contribute to increased supply and declining demand, thereby having a downward pressure on oil prices.

Reference:Andrews, E.L. (2007, May 20) Oil Price ‘Gouging’: A Phantom Menace? New York Times. Associated Press. (2008, July 1) Oil prices near $143 amid Mideast tension: Concerns about tensions between Iran and Israel, tighter supply. Associated Press. Retrived on July 4, 2008 from http://www.msnbc.msn.com/id/12400801/Associated Press (2008b, June 30) Iraq opens oil fields for international bidding. Associated Press. Retrieved on 4 July 4, 2008 from http://www.msnbc.msn.com/id/25453428/Associated Press (2008c, June 12) Today’s high oil prices could be here to stay: Unlike 70s, there is no more supply to quench growing appetite for crude.

Associated Press Retrieved on 4 July 2008 from http://www.msnbc.msn.com/id/25127525/Ganapolsky, E.J.J. (2008, July 1) The economics of oil prices. EconSouth. Winter 2004. Retrieved on 4 July 2008 from http://findarticles.com/p/articles/mi_m0KXG/is_4_6/ai_n15652724Grier, P. (2008, May 2) What has driven oil prices, The Christian Science Monitor Retrieved on 4 July 2008 from http://www.csmonitor.com/2008/0502/p01s01-usec.htmlSurowiecki, J. (2008, July 1) Oily speculations as energy prices soar, Congress unfairly seeks to blame traders.

The New Yorker. Retrieved on 4 July 2008 from http://www.msnbc.msn.com/id/25463588/Unknown (n.d.) The High Price of Oil. Foundation for teaching economics. Retrieved on 4 July 2008 from http://www.fte.org/hottopics/archive/oilprices.htmWebb, M.S. (2005) The simple economics of oil , The Sunday Times Retrieved on 4 July 2008 from http://www.moneyweek.com/file/3043/the-simple-economics-of-oil.html Wikipedia. (n.d.) Price of petroleum. Wikipedia the free encyclopedia Retrived on 4 July 2008 from http://en.wikipedia.org/wiki/Price_of_petroleum From,