Market equilibrium before accident
Demand line shifted to left
The article also refers to the new demand for diesel oil has increased in Japan, as people want to invest more in that area, instead of pure oil. As this happens, the demand for crude oil continues to decrease, but a similar area to crude oil, diesel oil will increase, leveling off the price for diesel, as it increases.
As the tsunami hits oil refineries and the nuclear power plant, the new technology lost a bit of its efficiency and also lost a lot of investors. Nuclear power is the second choice for power these days, so if demand falls for this technology, demand will have to rise in another, such as oil. This will pull back the demand line again for oil potentially stabilizing it.
Market equilibrium after accident
After mediations from nuclear power plant problems
The demand increases, raising the prices again for oil and even more as people will want more diesel oil.
Later on the article, it talks about how the governments invested in oil, and supplied more barrels, to have an attempt at decreasing the price of oil. This is buffer stocks system. This is a situation where a government intervenes in a market to stabilize prices. This often happens in unstable activities. This process isn’t a very useful one, as it is expensive to store materials and may be seen as in-human to not supply all oil at this time. This allows for governments to control prices and the stocks. A buffer stock scheme contains a maximum price and a minimum price, a “floor” and “ceiling” price. When one of those limits is passed, the government intervenes. It’s assessed after a report on that year’s performance. A “good” year, the government buys excess barrels of oil to avoid the price to drop under minimum standards. A “bad” year, such as this, the government sells their stored oil barrels to drop the price. This can be shown by this graph.
This graph and the buffer stocks system does not apply to Japan, but the Saudi-Arabia countries, which rule OPEC, whom they have a lot to lose from the demand of oil. The shaded area represents the revenue generated by the sale of stocks.
Here are two graphs to show the assessment of minimum and maximum prices for the buffer stocks system.
For the last comment, we can comment on the PED, Price Elasticity of Demand. It’s a measure of how much the quantity demanded of a product changes when there is a change in the price of the product. It is calculated by using the following equation:
PED = % change in quantity demanded for the product / % change in price of the product.
In this specific example, oil, the PED is very inelastic, as it is extremely unless than 1. The PED works otherwise in this example, as price goes down, the responsive is strong, as people will be relieved around the world. PED is very useful to know, as you know what the response will be to changes in prices. This changes everything, even for governments, as then they can know when to act in a buffer stocks system.
