Oil Prices: Demand and Supply
How changes in supply and demand affect oil prices
The forces of demand and supply in the marketplace determine the prices of fuel and related oil products. When the demand grows and disruptions in supply occur, pressure automatically pushes the prices and they go high. Whenever there is more people buying oil products and the products are rare, prices always shoots up and in the same case, when the oil products flock the market and the demand is down prices go down since many people are not competing for the commodity especially petrol. In this case, the demand is the motorists and industries that use the oil products and the commodity is oil itself. (Korin, 2004)
Cases of demand and supply are mostly common at the service station level and in particular the pump. Incase the retailer prices of gasoline go too high and in discount to opposition, customers go to other suppliers. For example, if a certain petrol station increases oil prices and others are still selling but at a cheaper price, motorists will tend to go to the cheaper service station since the product is the same but prices are different. Demand and supply dictate the prices of oil and its products. In such cases, the retailer lowers the prices with intentions of retaining the customers who would rather buy from the cheap retailer.
Competition among retailers affects prices but the cause of completion is demand since the supply is almost constant at this level. In any business regardless of whether it sells vehicles or oil products, competition is more of choices made by the customers. Although many gasoline sellers brand themselves names of major oil companies, many of them are independent and private; it is their choice to make any changes in price of the commodities and services offered.
Two countries that are the largest consumers of petroleum products
Talking of oil, it is the most used commodity in the world since it is the only crucial source of energy in the world. Without oil, many countries would be far far behind the global economy. The developing and the most developed countries are the largest consumers of oil and its products, which include tires, petrol, Grease, paraffin and tar. Since there is an increase in utilization of the modern machines because of the world’s industrialization, consumption of oil has risen and it will continue to rise.
United States of America is the largest consumer of oil with eighteen million, six hundred and ninety thousand barrels per day. China closely follows with which consumes eight million and two hundred thousand barrels per day. Looking at these two countries, they are the most developed countries and with the largest populations in the world. These two countries also maximize and utilize the modern machines and distribution of labor. The two countries also happen to be in the list of the world’s top oil producing countries. (Fleig, 2005)
Fall of SUVs prices.
Fall in the price of sports utility vehicles translates in rise of demand. These are the dream cars for many people but because of price, many are not able to afford them. When more people buy the utility vehicles, consumption of oil goes high having in mind that they are fuel guzzlers. The quantity of oil subsequently goes down leaving many people without oil. This means that the demand is more than the supply and therefore the prices go up. This has happened in china where they fell in love with the SUVs and they bought more causing more traffic jams and increased consumption of oil. Any increase in demand and shortage of supply results to rise in prices, which applies to this case. (Simmons, 2005)
Manufacture of these vehicles requires a lot of machines and energy which barely comes from oil and therefore most consumption but constant supply. There is fast manufacture of the vehicles since they are on demand and more barrels of oil go down in the industries. This is a clear indication that there is more demand of oil but constant supply therefore rises in prices.
The government approves more drilling in Alaska.
This is the most challenging and confusing part since the decision of the government to drill more oil in Alaska might increase the supply or demand of oil. It would increase the supply in the fact that there will be more establishments of oil wells leading to more supply. This will definitely lower the prices since the demand will be lower than the supply. The decision could also mean more consumption of oil while drilling thus increase in demand and at the same time increase in supply therefore no effect on price. The constant price will be short term and once the drilling is done, prices will again fall since the demand would still be smaller than supply. (Tolf, 2006)
The reason behind the decision to drill more oil is to lower prices of oil products. It is a wise decision compared to lowering prices without any market strategy. Lowering price by increasing supply is more professional and the economy gets positive change unlike lowering prices with nothing done on either supply or demand. More oil supply and lower prices could lead to more people buying cars and the same oil used to produce them therefore the decision of drilling more oil has both supply and demand effect. Lowering or increasing prices without necessarily taking control of demand and supply would bring oil crisis like the one that came up in the year 1973.
Lowering pump prices
Lowering some commodities prices like gasoline at the pump without interventions of demand and supply would result to a crisis similar to the famous 1973 fuel crisis. The crisis was a result of increments in oil by OPEC. The decision would favor the motorist and other consumers at the pump but in the end hurt the economy of the target countries since there is a limit of activity in the economy.
The decision of the target countries would be permanent and dependable. This would slower the economy, as the dependable solutions would take time. Many problems would arise and anything concerned with oil would slow down including the use of oil in industries. In the 1973 crisis, many problems arose and badly affected the world’s economy. The problems went through even after 10 years where the oil prices positively affected other countries like in Japan, which started doing well as a result. The best way to lower the price of gasoline for example is to get more supply of oil and serve the high demand. (Anderson, 2005)
Anderson, R. (2005). What is Driving Oil Princess. Retrieved on 15th May, available at http://research.stlouisfed.org/publications/regional/05/01/oil_prices.pdf
Fleig, F. (2005). Oil Empire. Cambridge: Cambridge university press.
Korin, A. (2004), Energy and Security. Retrieved on 15th May, available at http://www.cepen.org/download/66/
Krylov, N. (1998). The Oil Industry of the Former Soviet Union. New York: McGraw Hill press.
Simmons, M. (2005). Twilight in the Desert. New York: Blackwell press.
Tolf, R. (2006). The World's First Oil Tankers. New Jersey: Prentice hall.
