The Rise and Fall in Oil Prices

The Rise and Fall in Oil Prices
Market Equilibrium Price and Quantity Equilibrium price is a price that is stable, no other forces act on it, where the planned purchases are exactly equally to the planned sales. If the price is higher than this point, some goods not sold, then there is an excess supply. market equilibrium To counter this prices will be cut to increase demand and the market will move back towards the equilibrium position. The net effect of all changes is for the market to move back towards the equilibrium position. Shift in Supply and Demand Supply is output that companies produce to try and match demand for that product. Supply will shift up or down depending on the market conditions. As prices increase supply will increase as companies try to make a larger profit, in most cases. Demand is the want for a product by a consumer. Change in demand can be positive or negative. A shift in demand will be a result of another factor external or internal which will result in demand levels increasing or decreasingOwn Price Elasticity of Demand Own price means the price of the good sold not taking into account substitute goods. Price elasticity is a way of describing how responsive the demand for a good is to a price change. Demand is elastic if responds greatly as price changes. Demand is inelastic if the response is small as price changes. Own Price Elasticity of Supply Own price elasticity of supply measures how responsive the supply for a good is when the price changes. Supply will be elastic when it responds greatly to a price change. Supply will be inelastic when it responds little to a price change. Most products will have a supply that is elastic as companies want to increase profit, however it is not always economically possible to continue to increase supply as prices rise. Price Fluctuations in Oil prices The major reason why oil prices have fluctuated the way they have in the last 30 years is due to political unrest in the countries, which we obtain the oil. There is no pattern in the change of oil price during this time; the only difference is to what the current climate is in the particular countries. Also natural disasters help in the fluctuation of oil prices, hurricanes in the America?s halt the rate of production, for example hurricane Ivan last year severely affected the production in the Gulf of Mexico, therefore causing an increase in oil prices. The first main Fluctuation is from the war between Iran and Iraq. Both Iran and Iraq are large oil-producing nations. The largest peak in prices, $90 a barrel was caused due to the war between Iran and Iraq. Oil is the main source of income for both Iran and Iraq, without the income they receive for exporting their oil they would probably be very much in economic decline. Therefore oil was likely to be a main target for the respective country, ?hit them where hurts? and for both Iran and Iraq oil is the crown jewels of the economy. People from either nation are well aware of how much disruption they can cause by targeting oil supplies. Indeed many people from opposing nations have targeted pipelines and oil reserves reducing these oil supplies. Basic supply and demand states that, if supply is reduced and demands remains the same, prices will rise. This therefore has an overall effect price of oil because if the resources used in the oil supplies e.g. the pipelines get disrupted the only way for the companies to generate income is to put the price of oil up because the price will also have to account for the cost of the damage. A reason for a fluctuation in price is to do with the shift in demand coming from China; the growth from China is between 5%-7% more barrels of oil each year. Continued growth like this will see them the biggest consumer by 2025, taking over America. This increased demand from China would typically result in an increase of supply, however opec have restrictions on the supply of oil and as not wanting to over supply, like what happened in the Asian market in the late 90?s, as prices will fall rapidly, the price per barrel increases. Over-supply is not the only reason there is no shift in supply, the main reason for no increase in supply is that most all the worlds refineries are working at maximum capacity, only Saudi Arabia have spare capacity to utilize. These factors are reasons why in recent times the price of oil is increasing, Demand is greater than supply and supply is struggling to increase, this results the market never being in an equilibrium price and quantity position and would therefore explain why prices are still increasing. The Asian economic crisis contributed to the sharp decline in oil prices from late 1997 through the beginning of 1999. This then had further effect on the economic activity causing it to decrease resulting in oil demand to fall. If the demand falls then the price of oil will fall too. Indonesia and Malaysia, are net oil exporters, and experienced a decline in the income from oil. This point on the graph is shown by one of the lowest points in the form of a trough. In this time there had been a vast oversupply of oil causing an increase competition between rival nations and a decrease in demand. Therefore to generate the largest form of income each nation had to reduce the price of the oil, which had dramatic effects on the global price of oil reducing it to on of its lowest price just above $10 per barrel. The supply for oil would be elastic if the reserves were there to cope with the increase demand and increase prices, however the demand for oil is inelastic as there is very little change in demand when there is a price rise, as oil is necessary good for millions of firms worldwide and therefore until an alternative good is found they have to pay the increase oil price. Oil prices would maintain a steady enough figure if world could be certain of the future. The main reason oil prices have risen in the past and still rise today is simply there is no market confidence and the uncertainty around future supply drives the price up. Changes, Short Term and Long Term Oil will eventually run out, due to the fact that the populations consumption rate is very high compared to the rate that oil is being produced naturally because for oil to be produced naturally it takes millions and millions of years. This result?s in oil becoming more and more scarce therefore when something is in short supply the demand for that product is high. More demand causes an increase in the price of oil. The constant growth in population in countries such as India and China causes the demand for oil to increase as well as the consumption. If the population keeps on growing the competition between people needing oil will increase. When there is competition for a product the production company for that product has the ability to increase price because there will be shift in demand. People are willing to pay more for the same quantity. So for the production company to generate the best income they will charge the cost of oil to be at its highest possible price for that point in time. However having said this, the United States of America have now had a bill past allowing them to drill into the oil supplies in Alaska. The proposed site for the drilling would be the National Wildlife Refuge situated in the heart of Alaska, and if the drilling is allowed, which the Bill should get through the House of Representatives, then this 770 acre area of land will be able to produce 1.9 Billion Barrels of oil at a cost of $24 per barrel, with much more in reserve, this would drop the price of oil dramatically for the usa but elsewhere the price would stay the same. There has also been oil fields discovered in Alberta, however this will be a lot harder for the US to get hold of as Alberta is in Canada. But if access were to be gained to this site then a further 2 trillion barrels would be available for use. I believe that there are many uncontrollable factors in determining the future price of oil but the trends due suggest the future pattern I have predicted. Prices will continue to rise as demand increases mainly due to China?s increasing demand and the fact oil production is expected to slow down in the next 30 years then this will only lead to higher prices in oil in the long run, but in the short term I can see prices dropping if the oil is obtained from North America.

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