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What influences the demand and supply of oil

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Published: Mon, 5 Dec 2016

The supply demand curve plays an important role in determining the equilibrium price for any commodity and to understand the oil market demand and supply curve we have to consider following exemptions.

Oil Supply and Demand is inelastic to the short term as irrespective of what petrol cost the car is not going to switch to other fuel or the distance between the two place also not going to reduce this results the consumption of oil remain same in short run so the following cases are being treated under long term basis.

The Organization of the Petroleum Exporting Countries (OPEC) is engaged in making policies and stabilize the oil price in the world i.e. governs the total pricing strategy regarding which sometimes over through demand curve elasticity.

Supply – Demand curve

The Supply-Demand curve is basically a graphical illustration of supply trend and demand trend of product/services that is used to conclude the equilibrium price of the entity. As in equilibrium price is the price where the demand and the supply curve intersects i.e. the point where quantity demanded is one and the same to the quantity supplied. And change in the factors which directly or indirectly affect the demand and supply of the entity results in change in equilibrium price due to the shift in the demand curve, supply curve or both the curves.

Before we discuss the required conditions from the cases one should know the basis behind the shifting of the supply and demand curve in a supply-demand graph.

Shift in Demand curve

The demand curve on the whole corresponds to the amount of some entity that a buyer wants to buy at a certain level of price. The increase and decrease in demand could come from changing fashions and tastes, incomes, price changes in complementary and substitute goods, market expectations, and number of buyers. This would cause the entire demand curve to shift changing the equilibrium price and quantity. The shift of the demand curve, by causing a new equilibrium price to emerge, resulted in movement along the supply curve from the intersection of demand and supply curve before and after the change in the demand of the commodity.

Shift in supply curve

The supply curve basically represents the amount of some goods that the producers are willing and able to sell at various prices. The factors affecting directly or indirectly in increase or decrease in the supply of the goods i.e. when the suppliers’ unit input costs change, or when technological progress occurs, results in shift of the supply curve. The shift in the supply curve also results in changing in the equilibrium price and quantity of the product.

The above mentioned supply demand curve shifts can be explained better by diagrams in the different cases as mentioned below-

Case 1: A major oil discover

Shifting of curve(s)

A major oil discovery leads to increase in supply of crude oil in the market and this decreases the raw material price or input price which results in supply curve shift towards right i.e. from S1 to S2.

S2

S1Untitled

The resulting impact on equilibrium price,

The demand curve remains unchanged and is results in decrease in equilibrium price of the oil. And the quantity of oil at the equilibrium price is also increased.

The movement along a curve

The increase in raw material leads to decrease in input cost results in leftward movement along the supply curve

Case 2: A $5 per barrel tax on oil

Shifting of curve(s)

The sales tax is raised on a good increasing the cost to the seller, decreasing the profitability on each unit and therefore the quantity offered at each price is decreased leads to leftward shift of supply curve.

S2

S1Untitled

The resulting impact on equilibrium price,

The equilibrium price increases and the price per unit quantity of oil increase as the taxes are extra.

Movement along a curve

A change in price initially results in a movement along a demand or supply curve, and it leads to a change in the quantity demanded or supplied. Price increase moves us leftward along demand curve and rightward along supply curve.

Case3: An improvement in oil recovery technology

Shifting of curve(s)

The increase in a cost-saving technological advancement leads to increase in the supply of a good, shifting the supply curve to the right i.e. from S1 to S2

S2

S1Untitled

The resulting impact on equilibrium price,

As the demand of the product remain same and the supply increase or supply curve shift towards right results in decrease in the equilibrium price.

Movement along a curve

A change in price causes a change in purchasing power, and therefore a change in the quantity demanded more can be afforded leads to rightward movement along the demand curve.

Case 4: An unusually hot summer causing an increase in the demand for air conditioning (Oil is used to produce electricity)

Shifting of curve(s)

This is a case of increase in demand of compliment which indirect leads to increase in demand of the product and by keeping remaining factors same it leads to rightward shift of the demand curve.

D2

D1 Untitled

.The resulting impact on equilibrium price,

As the demand curve shifts rightward and supply curve unaffected leads to increase in equilibrium price.

Movement along a curve

The increase in price per unit of oil leads to move toward left along the demand curve and move towards right along the supply curve.

Case 5: An increase in energy conservation

Shifting of curve(s)

This reduces the demand of the oil in the market hence results in shift of demand curve towards left

D2

D1 Untitled

The resulting impact on equilibrium price,

As the demand of oil decreases and supply remain unchanged misbalance the production and consumption hence results in decrease in equilibrium price.

Movement along a curve

The decrease in price per unit of oil leads to rightward movement along the demand curve and leftward movement along the supply curve.

Circumstances where demand curve be upward sloping

The Demand curve is generally downward sloping for the goods because it follows law of demand that states the demand for a commodity increase when its price decrease and falls when its price rises, other things remaining constant. But there are certain exceptions for law of demand that results in upward sloping demand curve.

The three major circumstances where demand curve shows upward sloping are as follows:

Expectation regarding Future price – If the consumer expect a continuous increase in the price of durable commodity. It may start purchasing greater amount of commodity despite in its price with a view to avoid the pinch of much higher price in future. Similarly when a consumer expect for decrease in future price it postponed the purchase for future. For instance, in pre budget months price generally tends to rise. Yet people buy more storable in anticipation of further rise in prices due to new levies.

Status Goods – The law of demand does not be relevant to the commodities which are used as a ‘status symbol’ for enhancing social prestige and for displaying ones wealth. The amount demanded for such commodities rise with an increase in their price and decrease with decrease in there price. For instance commodities like gold, precious stones, rare paintings, antiques, etc. Rich people buy these goods mainly because their prices are high and buy more of them when their prices move up.

Giffen goods – A Giffen good may be any inferior article of trade much low-priced than its superior replacement, consumed by the poor family circle as an important commodity. If the price of such merchandise raise (price of its substitute left over steady) its demand enhance instead of fall because in case of a Giffen good, income effect of a price levitate is more than its substitute effect. The reason is when price of inferior product increases, income lasting alike, poor inhabitants cut the consumption of the superior substitute so they may buy enough quantity of inferior entity to meet their fundamental need. For example when price of potatoes (A main food for poor people) decline drastically, and then this household may like to buy superior commodity out of the money which they can now have due to the decline in price of potatoes. It would increase the consumption of superior goods like fruits, cereals, etc., not only from these discount but also from reducing the consumption of potatoes. Thus drop off in price of results in decline in consumption of potatoes.


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