Introduction
Market economies constantly change depending on the demand and supply of goods. The demand and supply of a particular service or good is dependent on the unique characteristics of the product that determines the quantity that individuals in the particular market are willing to consume. Other important determinants include the price of the product, the consumer’s preferences; the price of other related products as well as the demographic and income characteristics of the population (Rittenberg & Tregarthen, 2012). The concepts of supply and demand studied in the course are crucial concepts in economics as they are the backbone of the market economy. Demand is described as the quantity of a service or a product that the consumers are willing to buy while supply, on the other hand, represents the product’s quantity that the market can be able to offer. The price of a commodity greatly determines its supply and demand; therefore, a product’s price is a reflection of its supply and demand. In regards to the above information, the paper analyzes the current oil price plunge that has resulted due to the oil market demand and supply changes. Thus, the paper will discuss on the oil price fall in relation to the supply and demand concepts studied in chapter three of the course book. Oil prices have dropped to below $75 per barrel from over $100 per barrel in a recent couple of years. The low oil prices are expected to remain this way until there is a change in the products market demand and supply.
Trends in oil demand and supply
Oil prices have fallen continuously over the years, and the prices have dropped to as low as $75 per barrel. According to economic analysts, a rebound to the original price of over $100 per barrel is not expected to occur soon. The collapse of the oil prices dates back to the Great Recession period that was marked by a plunge in the economic activities as well as a decline oil demand. During the period, there was an increase in the oil supply but a low oil demand forced the prices to fall gradually. The United States later discovered new oil mines in the states of North Dakota and Texas that further increased the oil supply. After the global financial crisis, there was a decline in the rate of economic growth in Europe and China who were large oil consumers; therefore, the financial crisis led to a decreased oil demand that significantly contributed to a drop in the prices of oil (Blitzer, 2014). Over the years, the oil demand has almost halved since 1980 due to the development of other energy efficient sources that are more environmental friendly that has reduced oil energy consumption.
There has been an upward rise in the oil supply with the discovery of new oil mines and since 2014, there has been a sharp decline in the oil prices. Among other factors associated with the oil price fall, include geopolitical risks threats that have negatively affected the production process, changes in the OPEC policies as well as the recent appreciation of the United States dollar. It is very difficult to identify the overall contribution of each factor towards the sharp fall in the oil prices, but the increased supply factor plays the major role. Despite the availability of other energy efficient substitutes, oil is a very basic product that the world cannot currently do without, therefore, its demand is inelastic. Change is the prices of oil whether positive or negative will not affect the commodity’s demand since it is a necessity product. However, a change in the products supply and demand will significantly affect the product’s price (World Bank, 2015).
Macroeconomic implications of the current plunge in oil prices
The reduced oil prices have led to a decline in the energy cost because when the oil prices are low, the other alternative sources of energy are also forced to fall too. This applies to other broad range crude oil produced products such as the petrochemical products. With the reduced energy prices, other sectors such as the manufacturing and agricultural industries have benefited greatly from cheap energy available in the market. The plunged oil prices have contributed positively to economic growth in the oil importing nations as reduced oil prices reduce the inflation rate as well as the fiscal and external pressures related to importation of oil and oil related products. For the oil exporting nations, the external pressures resulting from the associated weak oil economic activity has significantly affected them. This is because the oil is sold at very low prices that cannot meet even the production cost.
Conclusion
Oil prices have been falling continuously over the years, and the prices have dropped to as low as $75 per barrel. The collapse of the oil prices dates back to the Great Recession period that was marked by a plunge in the economic activities as well as a decline oil demand. At the time, there was an increase in the supply of oil, but the demand was quite low that forced the prices to fall gradually. The low oil prices are expected to remain this way until there is a change in the products market demand and supply.
References
Blitzer, D. (2014). The simple economics of supply and demand suggests oil will not be back @ $100 soon. US: Economic times. Retrieved from http://articles.economictimes.indiatimes.com/2014-12-04/news/56723401_1_oil-prices-oil-demand-supply-and-demand
Rittenberg, L., & Tregarthen, Timothy D. (2012). Principles of Microeconomics: Version 2.0. Washington, DC: Flatworld Knowledge. eISBN: 978-1-4533-3267-2
World Bank. (2015). Understanding the Plunge in Oil Prices: Sources and Implications. Global Economic Prospects, 133(January 2015), 155–168. Retrieved from https://www.worldbank.org/content/dam/Worldbank/GEP/GEP2015a/pdfs/GEP2015a_chapter4_report_oil.pdf
