Oil is a necessity. This means that the demand curve is very steep.
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P1 P
QD Q1 Q
This diagram shows that if an oil supplier raised the price from P to P1 the quantity demanded only fall a small bit compared to that of the price rise. The section between P and P1 is the gain from price change. The small gap between Q and Q1 is the loss. As you can see the gain is a lot bigger than the loss. PxP1 < QxQ1. This shows that it is a huge gain for the suppliers as they gain a lot of revenue. This gives the oil suppliers an incentive to raise the price.
The world's major oil consumers remain dependent on the Middle East for their oil. Recent violence in Iraq and Saudi Arabia has again raised fears about an interruption to supplies. Iraqi exports have been cut by sabotage attacks on oil facilities. The reduction in supplies has been relatively modest but it has caused some doubts about Iraq's longer term prospects of becoming a large and stable oil exporter. Attacks on foreign workers in Saudi Arabia by Al-Qaeda-inspired militants have also increased tensions. Any substantial attack on Saudi oil facilities would be a major event for world oil markets. The country is the world's biggest oil producer and, by far, the biggest exporter. If these attacks did take place and were substantial, the world and its economy would suffer greatly. This is because, currently, oil is the main way we power our lives.
Another reason why oil prices are so high is due to the increased demand from industrial countries, mostly China. China’s rapidly expanding economy needs oil to power it factories and businesses. Because they are such are large country, the oil needed for petrol ect., and have large amounts of oil driven products and oil derived products they need to demand vast amounts of oil. Chinese demand is up 20% over the past year.
This table shows how increase of demand can affect the price.
An increase in demand causes the demand curve to shift to the right, for example China’s new demand. The new demand curve has caused price to rise substantially, the QD has risen also. This increased demand will cause to put pressure on the dwindling oil supplies and the need to find an alternative.
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This graph shows just how quickly the oil prices have risen in the past year for “Brent Crude Oil”.
It is known know that oil prices have reached their peak so far at over $100 a barrel.
UK growth forecast is down from 2.4% to 1.9%, but US growth is still predicted to reach 3.6% this year. Germany's growth outlook has weakened from 1.2% to 1%. This was largely because of the soaring cost of oil, which has risen by about $20 a barrel.
The oil prices will have an effect on the world travel and transport market. This is because oil is used to power the machines that transport the user of the transport. As the travel companies will have to pay more for the oil, they will have to recoup the cost another way. By raising travel costs. This will have a large effect on airports, Buses, taxis ECT. As the consumer will have to pay more, they will not be as willing to use the service, making this market dwindle slightly. Other similar markets that do not use oil, although not many, may pick up the lost consumers. Every good in the world will need to be transported to places where they will be sold. This will mean that transporting goods will be more expensive. Because of this, the price of almost every good will increase to make up for extra transport costs.
A lot of products are derived from oil. This will mean that the cost production will increase. Therefore, the extra cost will be passed onto the consumer.
The significant rise of oil prices affects a vast amount of things in the world and is down to many reasons, for example increased demand leads to a rise in price. This rise in price effects many other markets in the world, not only the oil market. Because all these other markets are affected, they need to increase the price of many goods. Ultimately, the worst affected by the rise in oil prices is the consumer. Not only will they only need to pay more for transport, almost everything else they use will be more expensive.
By Ryan Goody.
