Micro Economic Article: Oil Prices: Whats Behind the Drop - Essay Example

Micro Economic Article: Oil Prices: What’s Behind the Drop? Simple Economics Oil Prices: What’s Behind the Drop? Simple Economics The demand and the supply of a good is an important factor in knowing the market behavior the good adopts. The higher the supply of a good, the lower the market prices the product tends to incorporate and the lower the supply of a good, the higher the market prices of the product (McConnell Brue Flynn, 2015). On the other hand, the higher the demand for a good, the higher the price the consumer is willing to pay, and in contrast, the lower the demand for a good, the lower the price the consumer is willing to pay (McConnell Brue Flynn, 2015).

In the article about the drop in oil prices, demand and supply are key components in the organization of the paper. The oil industry was at its peak in several states like Texas providing employment and raising the state’s revenue. Lately, the oil business is at the brink of its downfall. It has lost investors, job loss of the oil workers and decommissioning of oilrigs by the companies. The main reason for this is the huge price cuts of up to half the earlier price of an oil barrel since June 2014.

According to specialists, oil prices will gain back its original price in several years’ time. The reason for the drop in oil price narrows to the supply and demand economics. The supply side of oil is a contributing factor to this situation. Domestic production of oil has been on the rise over the last six years and this led to the push in oil importations to other consumers. Competition for oil markets in the Asian community by the different oil producers has led to the drop in the prices.

The different oil producers such as Canada and Iraq have a rise in the production and exportation of oil. The rise in supply of products and commodities in the markets tend to influence the price of the commodity in that it will lower (McConnell Brue Flynn, 2015). This applies in this situation, the high supply of oil by the different producers in the market results to the price reduction of oil in those markets. In order to meet the market equilibrium, the producers had to lower the market price if the oil due to the rise in the supply of oil they produced.

The demand side of the oil prices drop situation is also contributing to the situation. The weaknesses portrayed by the European nations and the developing nations make the demand for oil be low. Another factor for the low demand is the production of energy-efficient vehicles, electric and hydro cars, which do not require much oil use. Factors that affect the changes in demand of a good portrayed on this side of the situation are contributing factors to the situation addressed by the article.

These factors include; prices of substitute goods such as production of hydro and electric cars to substitute cars using oil (McConnell Brue Flynn, 2015).The lower the demand the oil markets showed made the producers lower the oil prices in order to reach a market equilibrium (McConnell Brue Flynn, 2015). Largely, the article is a good example of the economics topic on the effects of demand and supply of a product on the product’s prices. It also depicts how market equilibrium conditions meet in order to balance the demand or supply of the product and the market’s prices.

The topic on demand and supply is a nice tool in analyzing the rise and drop in market prices of commodities and products as observed in this situation. References Krauss, C. (October 5, 2015). Oil Prices: What’s Behind the Drop? Simple Economics. The New York Times. Retrieved from http://www.nytimes.com/interactive/2015/business/energy-environment/oil-prices.html?_r=0 McConnell, C. Brue, S. and Flynn, S. (2014). Economics: Principles, Problems, & Policies. Boston: McGraw-Hill Education. Print.