Analyzing the Supply and Demands of Oil Market - Essay Example

Analyzing the supply and demands of oil market Oil is certainly one if not the most priced commodities that dictates the tempo of the world market as well as world economy. It has been the trend for over a century when oil was introduced and become a part of almost all of the major activities in the whole world. From cooking meals to generate electricity or to run automobiles, we cannot deny the fact that this product has something to do with man's life. In this regard, oil prices have been dictating the prices of major markets that are associated with the consumption of it and upon analyzing such a thing, the conclusion that when oil prices went up, the prices of some major commodities follows the movement. In case the price of oil went down, then the price of such commodities were also stable, and if the price of this commodities went down, then these products also follows such occurrences. If we are to analyze this, one might ask, what is with oil that it has the power to control different scenario On the second thought, analysts particularly economists suggests that it is not only the oil that can have such a trend, but almost every product that is available to the market. This kind of occurrences is dictated by the demand of the customers and the availability of the product. In this case, the law if supply and demand comes into picture. Therefore, what is the law of supply and demand Before analyzing such a law let us first scrutinize the meaning of demand and supply with regards to economics perspective. The Columbia encyclopaedia (2005) described supply and demand as, 'Supply refers to the varying amounts of a good that producers will supply at different prices; in general, and a higher price yields a greater supply. Demand refers to the quantity of a good that is demanded by consumers at any given price. According to the law of demand, demand decreases as the price rises.' Upon analyzing this premise we can now have a clearer picture of what supply and demand has something to do with the oil market. It is now clear that oil will be regarded as the supply and the wanting of the consumers to get the oil to compensate their needs is the demand. Upon looking into this scenario, one might conclude that the oil as a commodity has the power to dictate its price regarding to the demand of world market. As stated on the first page that almost every human activities on earth needs the consumption of oil, therefore, it would be safe to conclude that there is a huge amount of demand for oil. From cooking meals, generating electricity and running automobiles, this kind of activities consumes oil. If we are to base such things with the aforementioned premises, the price of oils would tend to go up and it is due to the law of demand. The law of demand is defined as " a microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa (answers.com 2006)." In this regard, the flow of the prices of oil would tend to go up if we are to base this phenomenon to the worldwide demand of oil. All over the world, oil is a necessity in life. On the second thought, one might ask that why it is that oil can dictate the flow of economics of some countries in the world Why is it expensive than other necessities The answer would be, it is because of the availability of the product. If we are to compare oil's prices in the majority of Middle East countries where oil is abundant against distant countries such as the Philippines where there is a minimal source of the said product, there is a huge amount of difference with regards to the amount of oil. In countries such as Saudi Arabia, UAE, Kuwait and the likes, oil prices ranges from $20-$30 centavos per liter to judge against $1.2 per liter. This is due to the following reasons: 1) the fact that oil production is limited, then the priorities of the distribution of oil would be in the countries were it was extracted and therefore, counties importing the oils would just be the next concern. 2) The transport cost of the product from the source to the consumer and 3) the availability of oil to be distributed. Upon analyzing this availability and proximity is another issue with regards to determining prices in oil market. However, the demand and supply is still a major issue if we are to tackle this issue. In 2006, most of the countries in the world experienced booming oil prices in the market because oil demand went up. The Energy Information Administration (2006) of the United States stated that "world oil demand grows from 80 million barrels per day in 2003 to 98 million barrels per day in 2015 and 118 million barrels per day in 2030. Demand increases strongly despite world oil prices that are 35 percent higher in 2025 than in last year's outlook. Much of the growth in oil consumption isprojected for the nations of non-OECD Asia, where strong economic growth is expected. Non-OECD Asia (including China and India) accounts for 43 percent of the total increase in world oil use over the projection period." In this case, if we are to analyze, both the sellers and the buyers of oil has no power in dictating the price of the oil rather it is because the demand of oil is increasingly great, in this case the theory of demand and supply comes into picture. However, if we are to analyze, peanut consumption in the United States also increased in the year 2006, now, why is it that peanut products doesn't have price increase like that of oil It is simply because peanuts can be produced and be replaced by other plantation of peanuts in the future. Oils, if consumed would not be replaced so the value of oil is much grater than the aforementioned commodity. Also, "world oil supply in 2030 exceeds the 2003 level by 38 million barrels per day. Increases in production are expected for both OPEC and non-OPEC producers; however, only 38 percent of the total increase is expected to come from OPEC areas. (EIA 2006)" This means that the demand would went up and the consumers as well as the sellers still, has no power in determining the price of this market. After all, supply and demand is stated as "description of how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand) (wikipedia 2006). Reference: 1) Columbia Encyclopaedia (2005) " Supply and Demand" sixth edition 2) Answers.com (2006) " Law of demand" opened January 10, 2007 URL available http://www.answers.com/topic/supply-and-demand 3) International Energy Outlook (2006) " Chapter 3, World Oil Markets" 4) International Energy Outlook (2006) " Chapter 3, World Oil Markets" 5) Wkipedia (2006) " Supply and Demand" opened January 10, 2007 URL available http://en.wikipedia.org/wiki/Demand_and_supply Read More