Why Oil Prices are dropping - Case Study Example

Why Are Oil Prices Dropping? Presentation of facts The fact under this case is that oil process has dropped to an unexpected low price of $82 per barrel. The other fact is that the drop has occurred so suddenly, such that it does not follow the conventional economic theories process of price reductions in the markets. Further, it is a fact that the price at which oil is currently selling is detrimental to the economies of the oil producing countries. This is because; a country like Saudi Arabia which is the largest oil producer globally would need the prices of the oil to retail at $99.

20, if the country is to break even. The case is even difficult for the countries, considering that for a country like Iran would need the price of oil to remain at $136, if it is to be able to support its growing economy (Al Mulla, n.p.). Determination of major issuesThe major issue in this case is the reason why oil prices are dropping (Al Mulla, n.p.). This is a major issue, due to the fact that the dropping of the oil prices is sudden and also unexpected. The other major issue in this case is why the oil producing countries are not doing anything to correct the issue of dropping oil prices.

Considering that the low process for oil is in fact harmful to the economies of these countries, it is expected that the oil producing countries should be doing something by now, to see the prices of oil increase to levels that can benefit their economies.Identification of applicable theoriesThe economic theory of demand and supply is applicable in this case. The theory states that when the supply is high, the prices of a commodity are low. However, when the supply is reduced, the demand for the commodity in the market increases, and with high demand in the market, the price increases.

AnalysisAccording to the economic theory of demand and supply, the oil producing countries are able o to see an increase in the prices of oil. This is because, the prices f oil are currently low, which then means that those countries can cut their supply of oil into the global markets to increase its demand, and consequently its price. However, as the case has turned out to be, the oil producing countries are not cutting down their oil supply into the market in order to increase demand and prices of oil.

In this respect, it can therefore be observed that the conventional economic law of demand and supply is not operating in this case.ConclusionThe conclusion in this case is that the reason for the dropping oil prices is not the normal operation of demand and supply forces in the oil market. There are other unrelated factors that are accounting for this occurrence.AlternativesThe theory of competitive rivalry provides that a market player can intentionally cause the prices of commodities in the market to fall below the equilibrium price, for the sake of hurting and driving away its competitors.

In this case, it is possible that the oil producing countries are deliberately dropping the prices of oil, in order to hurt the U.S. shale oil production, and thus drive it away as a new competitor seeking entry into the oil production market (Al Mulla, n.p.). Works CitedAl Mulla, Habib. Why Are Oil Prices Dropping? Forbes, November 24, 2014. Available at”: http://www.forbes.com/sites/realspin/2014/11/24/why-are-oil-prices-dropping/