Crude oil prices have risen by about 30% this year to levels not seen since the early 1980’s. The latest rises are causing worries in importing countries about the economic cost of higher energy prices. Higher oil prices can cause unwelcome rises in inflation, restrict economic growth and are unpopular with voters. (www.bbc.co.uk)
The recent violence in the Middle East has caused the oil prices to increase and also caused the supply to be reduced. The supply is low during violence in Middle East because countries like Saudi Arabia and Iraq were reserving the most oil in the world. Therefore, during the war the supply of the oil will decrease and the prices will increase.
Other political tension in non-middle east states Nigeria and Venezuela as having the potential to disrupt exports and drive up world prices.
Figure 2 below will show the supply and demand model when supply is low.
(Figure 2)
Figure 2 shows when supply is low, it shows that when supply is low the price is high this is because demand is high. The high price shifts the supply line to the left, while the demand is initially unchanged, so the price will go up and the consumption will fall.
Oil companies have tried to be more resourceful in recent years and operate with lower stocks of oil. This means that there is less of a cushion in the market against supply interruptions.
Other political tension in non-middle east states Nigeria and Venezuela as having the potential to disrupt exports and drive up world prices. This has also had an effect on prices and this might have been the case if stocks levels were higher.
Another factor that has caused the oil prices to change is the natural disasters that have happened in recent years. This has caused the oil supply to decrease. The hurricane Katrina had interrupted the oil production, importation, and refining the gulf area, thus having a major effect on oil prices. The Hurricane Katrina has crippled the supply-flow from off-shore rigs in the Gulf coast.
(www.wikipedia.org /Oil_price_increases_of_2004_and_2005)
The price would again increase because the supply is low and demand is high. The above model figure 2 shows the increase in price for the natural disasters and war ion the Middle East.
When the supply is disrupted, short term demand for the product may exceed the supply on hand and put upward pressure on prices. Consumers all over the country have been directly affected by the hurricanes. The basic reason was the imbalance between supply and demand. When the crude oil were shut in following hurricanes Katrina and Rita the countries supplies were reduced. The supplies were moved to other parts of the country, affecting supply in those areas. This has put upward pressure on prices on prices, as supply was affected but demand remained high.
People’s demand for oil and its products is unlimited, but supplier countries produce a fix number of barrels of oil everyday so as to maintain a technical shortage and, of course, higher profits. These few countries are the oligopoly of the oil industry, have a market leader and there are barriers to the entry of new countries (Sloman 1997: p124). These countries are dominating the market of oil and created the Organisation of Petroleum Exporting Countries (OPEC) in 1960’s. OPEC is an intergovernmental organisation that offers stability and success to the petroleum market. OPEC supplies more than 40% of the world’s oil market. From the supply side of view, OPEC is the main producer, being prepared to add or subtract to balance demand. Whereas, from demand side of view, every country is trying to reduce the consumption on petroleum, the government use tax strategy to control the oil price. With increase in price it will even out the supply as there is less purchase per head then it means that there is enough to share around. There may be cases of people not using car at all as they are not capable to coup up with the price increase. They may eventually prefer to use public services such as taxi, train, etc, which is a good way to promote public transport and hence reduce consumer spending which may lead to inflation. As per increase in demand, it's vice versa. This is demand for transport, so this means the price will increase as there is an increase in demand. Figure 4 below will show increase in demand
(Figure 3)
Figure three above shows when there has been an increase in demand. The demand line will shift to the right when demand has increased.
The above graph shows the crude oil prices from 1947 to September 2006. it shows that the price increase and decrease throughout the years and what has caused the change in price. The price on oil had increased the most to above $60 when the Iraq and Iran war was on. This is because Iraq holds the most oil supply in the world and due to war they were selling the oil at high prices as they needed money for the war. The above graph also states that at each war the prices have increased this is because there is a lot of demand on oil.
Elasticity
Elasticity is a measure of the responsiveness of one economic variable to a small change in another variable.
There is the price elasticity of supply and price elasticity of demand. The price elasticity of supply is a measure of the sensitivity of quality supplied to changes in price. It is measured as the ratio of the proportionate change in the quantity supplied to the proportionate change in price. Whereas, price elasticity for demand is a measure of the sensitivity of quantity demanded to changes in prices. Demand is measured as the ratio of the proportionate change in quantity demanded to the proportionate change in quantity demanded to the proportionate change in price.
I will show the elasticity of supply on the diagram below. (Figure 4)
Conclusion
In conclusion, I have observed that there are many factors that affect the change in oil prices. The war in the Middle East has had a major affect on oil prices. I have noticed that in the last decade the oil prices have tripled this is due to all the factors that has had an affect on oil. The supply has been low throughout the war and the natural disasters, which means that prices are relatively high. If the war did not have an affect on the oil then this would mean that the price on oil would be reasonably moderate. However, this is not the case so demand is high on oil and so is the price. I have also become aware of the OPEC and how that has affected the oil prices, OPEC has offered the stability and success to the oil market.
Bibliography
[04/10/2006, 11/10/2006]
[07/11/2006]
[01/11/2006]
[01/11/2006]
OPEC annual statement 2005 [02/10/2006]
www.wikipedia.org/Oil_price_increases_of_2004_and_2005 [11/11/2006]
[11/10/2006]
