Supply_and_Demand_of_Oil

Supply and Demand of Oil The United States uses roughly a quarter of the world’s oil, no matter the price the United States will still need to import an immense amount of oil. Oil is a factor of production and without many substitutes oil has become a necessity in Americans everyday life. Many factors cause a variety of shifts in supply and demand for the world commodity of crude oil. According to (Goose, 2007, para. 8), “The market for oil is unusual; because – in the short-term – both demand and supplies are highly inelastic.” What this means is, people need this product. Because fuel is made from oil any fluctuations in the price of oil will have little effect on the demand. If the price of oil were to increase the demand may fall slightly, which is why this particular commodity is inelastic. One event that can happen to cause a shift in supply and demand is large-scale natural disasters. Hurricane Katrina was the largest hurricane that ever passed through the Gulf of Mexico in which thousands of off shore oil platforms lay. After Katrina made landfall (Robin-McCaskill, 2006, para. 4) states, “The production of oil in the Gulf of Mexico fell by 1.4 million barrels a day. This accounted for 95% of the daily production of oil.” If 95% of oil production declines in the Gulf of Mexico the direct effect will be a sharp increase in the price. Another cause for a shift in supply and demand is developing industrialized nations. As countries, such as China develop a middle-class more people can afford vehicles; thus, shifting the demand, and supply of oil. The change in price of gas can directly impact its demand. Consumers may look for other options for transportation that require much lower use of oil. For example: taking a bus ride, carpooling, riding motorcycles or driving more fuel-efficient vehicles. These changes may lead to a major change in the demand curve. Equilibrium occurs when quantity supplied is equal to quantity demanded- An exact point; there is no surplus or shortage of goods. Shortage occurs when the price is low and demand grows higher than supply. A surplus in oil occurs when the price increases and consumers do not want to buy the products. The buyers and sellers are the only people involved in moving markets toward the equilibrium of supply and demand. Equilibrium moves accordingly when total demand and total supply shifts. Shortage always creates an increase in price because there are too many buyers and not enough goods. When the price of goods increases, the demand decreases and at this point consumers may buy the substitute product or may not purchase anything. The results of these creates surplus. Suppliers sell these surplus goods by decreasing their prices and consumers start buying again. Oil is one of the world’s most precious commodities. From gasoline to lubricant, oil has become a necessity for everyday life. Like other products that fall under the necessity classification, the price of oil can fluctuate greatly, and the demand would remain constant. The increase in price would however limit the amount of oil one could buy. An increase in oil supply does not guarantee a decrease in oil cost however, most other commodities become commodities because of scarcity. Diamonds, for instance, have such a high value because of the limited availability. The price of diamonds can increase, but the demand would greatly decrease. An increase in diamond supply would result in a price decrease. Unfortunately, oil becomes a necessity because of its limited substitutions. Coal would be the closest product related to oil, but coal lacks the versatility of oil. Even if the price of coal drastically decreases, the price of oil would remain relatively constant. In contrast, if the price of oil decreased drastically, consumers and manufacturers would see a decrease in demand for coal as more consumers shifted to more oil-based products. Diamonds, on the other hand, follow a more basic set of supply and demand rules. Diamonds have many substitutes such as rubies, emeralds, and jade. As the price of Diamonds increases, the demand reduces as more consumers can afford the lower costs of the substitutes. As one of the most demanded commodities in the world, many countries participate in the trade of oil within various types of markets. The United States consumes nearly 25% of the world’s oil (tutor2u, 2006). Many countries rely on oil as an input in their industries that produce goods and services. Here, in the United States, manufacturers use oil to produce the goods and services that they bring to market. The key role of markets is to facilitate trade. Two types of markets exist: 1. Product markets: goods and services like televisions and radios. 2. Factors of production: inputs used to make goods and services like water. Oil is used to make many of the goods and services for households (the demanders), therefore, it is a factor of production in a key way, and it is scarce. The basis of a market and a healthy economy relies on limited resources and oil is certainly no different, but it happens to be in high demand. Oil is not only used to operate most cars and trucks, it is also a key factor in their production. Households are the demanders and firms who are the producers both participate in the market for oil. Many firms are competing to supply it and there are many firms and households demanding it. Oil is important to the world, especially the United States; the United States uses more oil than any other nation in the world. No matter how high or low the quantity of oil, the demand for oil will always stay high. With no good alternatives oil will stay in high demand for the foreseeable future. References Goose, P. (2007). The Economics of Oil Part I Supply and Demand Curves. Retrieved from http://www.theoildrum.com/node/2899 Mind Tools Ltd. (1995-2010). Mind Tools Ltd. Retrieved from http://www.mindtools.com/pages/article/newSTR_69.htm Robin-McCaskill, J. (2006). Natural Disasters and Oil the Effect of Hurricane Katrina on Oil production in the Gulf of Mexico . Retrieved from http://pangea.stanford.edu/~jshragge/OilWar/Katrina.html Tutor2u (2006). AS Markets & Market Systems. Retrieved from http://tutor2u.net/economics/revision-notes/as-markets-oil.html