Analysis of the Oil Market - Assignment Example

Case analysis of the oil market The quantity of the oil that countries are willing to purchase at a specific price at a given time, other factors remaining constant is called demand while the amount oil that countries are willing to buy at a specific price at a given time is supply. The factors that determine the amount demanded by a country is the determinant of demand. Market size is one of the important determinants of oil demand globally. Developed economies such as Canada and United States use more oil compared to developing economies. North America is the largest consumer, followed by Asia, Europe then other regions. As opposed to the rest of the world which uses oil more for heat and power, Canada and The United States use oil more for transportation providing a larger market. The Northern Hemisphere provides a larger market during cold months. Developing countries provide a substantial market size but the increasing debt is making them a less targeted market (Luciani 85). The relative price of oil substitutes such as gas also affects the demand for oil. The development of reliable and cheaper oil substitutes may cause a shift in demand away from crude oil towards the emerging substitutes. Research and development of non-oil substitutes has risen since the high oil prices during 2004-2005, even though this can take years to affect the energy market. These substitutes include renewable and alternative fuels like hydropower solar wind geothermal, biomass and ethanol. Related goods can also be compliments of oil or goods that utilize oil and oil products like vehicles. If the prices of vehicles rise then the demand for oil will fall and if the prices of vehicles fall then the demand of oil will rise. This shows that related goods can either be substitutes or complements. The amount of income a country is willing to spend also determines the demand for oil and oil products. If the consumer country has more disposable income then the demand for oil will be more but if the income remains constant and the oil price rises the demand falls. Similarly when oil prices fall the amount of oil demanded for the same income will rise. This means that a relatively higher income level consequently increases demand levels and a lower income translates into lower demand for oil. This explains why developed countries demand more oil than developing countries. The dependency on oil has led to many of the developing countries to pile a lot of debts in their quest to acquire oil (Pirayoff 76). Rank   Top 15 Oil producing countries Countries   Amount   Date   # 1     Russia: 10,120,000 bbl/day   2010  # 2     Saudi Arabia: 9,764,000 bbl/day   2009  # 3     United States: 9,056,000 bbl/day   2009  # 4     Iran: 4,172,000 bbl/day   2009  # 5     China: 3,991,000 bbl/day   2009  # 6     Canada: 3,289,000 bbl/day   2009  # 7     Mexico: 3,001,000 bbl/day   2009  # 8     United Arab Emirates: 2,798,000 bbl/day   2009  # 9     Brazil: 2,572,000 bbl/day   2009  # 10     Kuwait: 2,494,000 bbl/day   2009  # 11     Venezuela: 2,472,000 bbl/day   2009  # 12     Iraq: 2,399,000 bbl/day   2009  # 13     Norway: 2,350,000 bbl/day   2009  # 14     Nigeria: 2,211,000 bbl/day   2009  # 15     Algeria: 2,125,000 bbl/day   2009  http://www.nationmaster.com/graph/ene_oil_pro-energy-oil-production Oil supply depends with its availability and it is believed that oil will be available for extraction even 500 years to come and this will meet the global demand. Oil supply is determined by a number of factors. Cost of the input is one of the determinants of oil supply; resources are invested in the exploration and identification of new oil reserves. The cost of extraction and profitability is also affected by change in technology of extracting oil. Changes in the cost of labor may change the supply of oil. Reduced labor availability and increased skill level may increase the input cost thus reducing the supply. Increase in capital increases in input cost leading to a decrease in supply. The costs of entrepreneurship which include organizing, managing, and making policies also affect the supply of oil. The more the cost the less the supply while lower costs imply more supply (Morsy 9). Billions are being spent on technology in order to increase the oil volume extractable from the ground. With increased amount of oil extracted the supply of oil will be high. The relationship between a country’s oil and its input is termed as productivity. Increased productivity enables a country maximize the output it is capable of getting from the oil reserves. Some oil reserves require sophisticated equipment and technology extract, this will reduce supply if the affected countries do have the appropriate technology. Another determinant of supply is price expectations; this involves guessing the price direction of oil, belief that oil demand will dramatically increase in the near future leading to an increase in oil prices, this is called sentiment. The supplier tends to postpone the supply if he expects future prices to rise. A price cycle that appears to govern the behavior of oil prices from the historical perspective. This cycle guides suppliers on when to supply more oil especially when the demand is high. This indicates that supply is largely determined by speculation on demand and price. Optimism about the financial future may increase the overall demand while more saving and less spending may be due to pessimism (Malika 7). Top 15 oil consuming countries Rank   Countries   Amount   Date   # 1     United States: 18,690,000 bbl/day   2009  # 2     China: 8,200,000 bbl/day   2009  # 3     Japan: 4,363,000 bbl/day   2009  # 4     India: 2,980,000 bbl/day   2009  # 5     Russia: 2,740,000 bbl/day   2010  # 6     Brazil: 2,460,000 bbl/day   2009  # 7     Germany: 2,437,000 bbl/day   2009  # 8     Saudi Arabia: 2,430,000 bbl/day   2009  # 9     Korea, South: 2,185,000 bbl/day   2010  # 10     Canada: 2,151,000 bbl/day   2009  # 11     Mexico: 2,078,000 bbl/day   2009  # 12     France: 1,875,000 bbl/day   2009  # 13     Iran: 1,809,000 bbl/day   2009  # 14     United Kingdom: 1,669,000 bbl/day   2009  # 15     Italy: 1,537,000 bbl/day   2009  http://www.nationmaster.com/graph/ene_oil_con-energy-oil-consumption The OPEC members in the top 15 are Saudi Arabia, Iran, United Arab Emirates, Kuwait, Venezuela, Iraq, Nigeria and Algeria. Pie Chart Illustrating the OPEC shares in top oil producers. Supply, demand and market sentiment towards oil do not entirely determine oil prices but rather by supply, demand and sentiment towards oil futures contracts. Research has shown that other sources of energy like biodiesel, fuel ethanol, hydropower, and geothermal will only affect the demand of oil if they are cheaper and available (Pagoulatos 116). The demand for oil will continue to be high as the need for energy and fuel go up with increasing vehicles and machines that use oil and oil products. The developed countries provide a larger market to oil than developing countries. Technological advancement in the area of exploration is also targeted in order to reduce labor and other production costs (Marquez 73). Works Cited Clô, Alberto. Oil economics and policy. Berlin: Springer, 2000. Print. Luciani, Giacomo. The Mediterranean region: economic interdependance and the future of society. London: Taylor & Francis, 1984. Print. Mabro, Robert. Oil in the 21st century: issues, challenges and opportunities. Oxford: Oxford University Press, 2006. Print. Malika Pant, Martin Mühleisen, Alun Thomas. Peaks, Spikes, and Barrels: Modeling Sharp Movements in Oil Prices (EPub). Washington: International Monetary Fund, 2010. Print. Marquez, Jaime. Oil price effects and OPECs pricing policy: an optimal control approach. Lanham: Lexington Books, 1984. Print. Morsy, Hanan. Current Account Determinants for Oil-Exporting Countries. Washington: International Monetary Fund, 2009. Print. Pagoulatos, Angelos. Major determinants affecting the demand and supply of energy resources: an analysis of the petroleum market. New York: Ayer Publishing, 1979. Print. Pirayoff, Ronald. Economics Micro & Macro . Hoboken: John Wiley & Sons, 2004. Print. Tamim Bayoumi, Alun H. Thomas. Today Versus Tomorrow: The Sensitivity of the Non-Oil Current Account Balance to Permanent and Current Income. Washington: International Monetary Fund, 2009. Print. http://www.nationmaster.com/graph/ene_oil_con-energy-oil-consumption http://khawaja.us/Jamal/article_oilprice.htm http://www.ecb.int/pub/pdf/scpwps/ecbwp855.pdf http://www.oecd.org/dataoecd/19/6/34080955.pdf Read More