The Oil Market Tendencies - Essay Example

Oil Market Decrease of oil prices in the economy On the positive drop in oil prices tends to reduce thegeneral inflation and, to some degree, the expectation of measures inflation. All else equal, reduced expectations of inflation and inflation tend to reduce the minimal interest rates and may spur better demand for interest-sensitive durable goods like housing and automobiles. Decreasing oil prices also assist in reducing operating expenses of the transport sector and other relatively large industries users of diesel, gasoline, and jet fuel. It is also evident that lower oil price instability is associated with improved capital business expenditures (Gisser, 2006). Deflationary pressures Deflation pressure, not inflation, is currently one of the greatest concern for the global economy. During the previous year, producer prices have reduced all over the developed world; consumer prices have been decreasing for the last 6 months in Germany and France; in Japan wages have actually dropped 4% for the past year. Up until the latest crisis prices were decreasing in Brazil; they continue to fall in China and Hong Kong; most probably they will soon be declining in various other developing countries (Case & Fair, 2005). Currently, none of these price reduction of oil seems anything like the great deflation that followed the Great Depression. But the presence of deflation as a common problem is worrying, not just because of its direct economic effects, but because until lately most economists considered sustained deflation as a profoundly incredible prospect, something that must not be a worry (IMF, 2011). Application of Demand and Supply in Oil Prices Elasticity and prices Although changes in prices have been controversial, they are the unavoidable outcomes of shifts in demand and supply. The demand and supply of oil are comparatively inelastic in the short run: price changes have a small effect on either the quantity supplied or the quantity demanded. When there is an increase in oil prices, we spend some energy and time complaining but, in the short run, spend nearly no effort in adjusting our habits to consume less. Likewise in the short run, price changes do less to spur new supplies. As the quantities demanded and supplied change slightly as prices increase and decrease, both curves are comparatively vertical as shown in the figure below:    Since quantities are comparatively fixed in the short run, any shifts in demand or supply affect prices. For instance, supposing that supply decreases. The reduced supply makes a temporary shortage that will increase the price. If demand is elastic, only a slight increase in price will be required to make consumers reduce purchases in order to meet the new reduced output. Nevertheless, if in case the demand is inelastic, it will take a considerable bigger price increase to create the required cut in quantity demanded (Case & Fair, 2005). The graph on the left side below demonstrates the case of elastic demand. The demand curve is quite flat, and the reduction in supply (from S to S) creates only a slight increase in price (from P0 to P1). On the contrary, if the demand curve is more vertical or less elastic (as shown in the graph on the right side), the same reduction in supply creates greatly a larger increase in price. In a case where the curves are elastic, changes in demand and supply causes some slight changes in price, but where curves are inelastic, the same changes cause comparatively larger price changes. As shown above, this changed the supply curve for oil to the left and increased the prices. Since the demand was inelastic, the increase in price was substantial. Reasons for decrease in prices Supply and demand Like any other commodity, the price of oil is determined by forces of supply and demand when the oil market experiences a surplus in supply, its price will be reduced. This is seen in the economic crises of the importing nations which cut the demand for its ability to import oil in increased price is less; this explains why the demand declines leading to the drop. Likewise when there is a great demand for oil, and it surpasses the supply, the price increases (Ruffin & Gregory, 2009). Military Escalation and Tensions The occurrence of a problem that interrupts the supply as a result of tensions or wars in the oil producing parts affects the price of oil. The geopolitical tensions in the Middle East countries where oil is produced could be among the causes of the increase in oil prices. Though this does not affect the amount of oil supply or demand, the oil market can shift towards an increase in oil prices if there are speculations of a possible disruption of supply. When tensions cool down, there is a decrease in the price of oil back to the real price the previous value or. Exploitation and Speculation of Economic Data Speculators target the market expectations to increase oil prices or cut it to earn more profits, and due to this, the oil prices is largely affected by supply and demand. Speculation and economic data depend on various key players, from oil-producing nations (such as Saudi Arabia. Canada, and Russia), and oil-importing nations (such as Japan, China etc.), and multi-national oil companies (like as Mobil, Exxon, BP etc.), the oil cartel (i.e. OPEC, and oil traders known as speculators). Every group can influence oil prices, either through influencing the supply or demand or by speculating the variation in oil prices. Speculation and Economic Data as due to economic crises in pertinent countries powerfully affect the prices. Impact of falling oil prices Impact on oil consumers Reduced oil prices assist in lowering the cost of living. Oil related carriage costs will directly fall, resulting to lower inflation rate and a lower cost of living. Reduced oil prices cause debt defaults that have widespread ranging costs. If defaults are widespread, they could have some effects on international trade and bank deposits. Reduced oil prices may lead to collapses of oil exporters, and loss of nearly all of the oil they export. A substantial drop in oil prices may lead to deflation, and as a result of this, there may be a difficulty in repaying debts. The reduction in oil prices is now having an impact on offshore drilling and shale extraction and On the contrary, if there is an increase in oil prices, so do food prices, and the price of producing various goods (Samuelson & Nordhaus, 2001). Thus increasing oil prices leads to inflation. The opposite of this is also true. Decreasing oil prices leads to a reduced price for growing food and a lower price for producing most goods. The result could be deflation. Conclusion Generally decreasing oil prices is a relief to oil importing countries. Nevertheless, some are deeply fearful concerning prospects for the global economy. The reduction in oil prices is basically a reflection of weak global demand. Continuous low growth around the globe, is affecting the demand. Therefore the decreasing price of oil is a replication of weak global growth – instead of the indication of economic recovery. References Case, K., & Fair, R. (2005). Principles of Economics. Prentice-Hall. Gately, D. ( 1997). he Demand for Oil Products in Developing Countries. World Bank Publications. Gisser, M. T. (2006). “Crude Oil and the Macroeconomy: Tests of Some Popular Notions. Journal of Money, Credit, and Banking 18 (1986): , 95-103. IMF. (International Monetary Fund). Macroeconomic Models for Adjustment in Developing Countries. Washington: 2011. Mankiw, N. (2011). Economics . Cengage Learning. Mork, K. A. (1998). Oil and the Macroeconomy when Prices Go Up and Down: An Extension of Hamilton’s Results. Journal of Political Economy, , 740-744. Ram, R. a. (2009). “Government Capital and Private Output in the United States; Additional Evidence. Economics Letters , 223-226. Ruffin, R. J., & Gregory, P. R. (2009). Principles of Economics . Glenview, Illinois: Scott: Foresman. Samuelson, & Nordhaus. (2001). Microeconomics . McGraw-Hill. Read More