Oil is one of the extremely traded products in the global markets due to its diverse uses which thus dictate its constant supply so as to facilitate the production process. For this reason, a majority of governments which undertake oil production have formulated comprehensive policies to govern their oil markets so as to ensure enough economic control of the precious commodity. Crude oil is the main product from which gas is extracted for specified uses in the markets such as automobile fuelling and many more. Thus, a change in the economic situation of the oil markets would also create a shock on the equilibrium of gas in the economy. Hence, these products are correlated and any change in oil would also affect gas. The most notable microeconomic relationship that is evident between oil and gas in the world is the element of oil prices in the global markets (Krugman & Robin, 142). The prices of oil are always in fluctuations due to various factors that affect the supply and demand of oil in the markets.
However, the increased level of fluctuations would also be attributed to the fact that oil and gas are regularly used commodities which must be available for the production process to be operational. In the microeconomic perspective, the demand for oil and gas in the global markets has been influenced by particular factors which control the oil industry. To begin with, oil is believed to exhibit a cyclical demand pattern in its consumption. Hence, in the periods of improved economic growth in the world there is an increase in the demand of oil. Therefore, oil portrays a positive correlation between the global GDP and its demand in the world. Thus, any country that would experience a growth in the national GDP would also have an increase in the demand of oil and gas in its economy (Krugman & Robin, 153). Secondly, the world has been experiencing rising living standards amongst a majority of the people, this situation has also triggered an increase in the demand for oil and gas by the people so as to facilitate their new lifestyles.
Thirdly, the price of substitutes for oil and gas is believed to be quite higher and due to this reason the demand for these products remain to be at a higher position. The substitutes for oil and gas would mainly comprise a variety of bio fuels which have a higher cost of production (Rajagopal & David, 64). Lastly, oil and gas are also found to have speculative demand that is widespread in the markets. As a result, a majority of investors in the oil sector flock the market at all time so as to acquire surplus oil which would be profitable under speculative market conditions. Therefore, the demand of oil in the global markets is determined by these factors which are prevailing in the oil markets (Miller, 82). A majority of the world oil is consumed by the highly industrialized countries which constitute the Organization of Economic Cooperation and Development (OECD).
It is believed that this countries demand over 60 percent of the global oil production hence ensuring a constant demand of oil and gas in the world. However, there is also a rising demand that is accrued from most emerging economies in the world which include; Russia, India and China. On the other hand, the supply of oil and gas in the world is evaluated by the quantity of barrels that are produced in a daily basis. Consequently, the global supply of oil and gas is determined by particular factors which prevail in the oil sector. Foremost, world oil reserves dictate the amount of oil that would be produced for the market. The has been a depletion of the world oil reserves due to the increased demand and this is expected to have a negative effect on the supply of oil and gas. Peak oil theory asserts that present world is past the crest of fresh oil discoveries and thus a majority of the countries would experience a long term reduction in the production of oil and gas in the future. Secondly, the level of exploration performed in the search for oil would also determine its global supply (Mills, 48). However, exploration is also believed to be an expensive process that is not practiced occasionally by a majority of nations thus compromising on the supply of oil and gas.
As a result, oil and gas would require increased exploration so as to guarantee a steady supply in the global markets. Lastly, the supply of oil and gas in the world is also influenced by the levels of technology adopted in the extraction process of these commodities. Improved technology would therefore increase the supply of oil and gas due to increased efficiency in its production (Cashin, 18). Oil and gas exhibit a relationship in their supply and demand in the short run market conditions. The short run supply of oil and gas is believed to be inelastic and this is consequently matched with a high demand for these products. Hence, the increased demand pushes the oil prices higher. An increase in the prices of oil also increases the prices of gas which is an intermediate commodity from oil. The increased demand for oil and gas decreases the stock in the refineries thus the supply is reduced. However, there is a time lag that prevails before the stock is replenished and this explains why oil and gas are regarded as price inelastic in the short term. As a result, the increased demand and the inelasticity of prices of oil and gas also portray the reason why prices of oil and gas are highly volatile in the markets.
Work Cited
Cashin, Paul. The Differential Effects of Oil Demand and Supply Shocks on the Global Economy. Washington, D.C.: IMF, 2012. Internet resource.
Krugman, Paul, and Robin Wells. Microeconomics. NY: Worth, 2005. Print.
Miller, Debra A. Oil. Detroit: Greenhaven Press, 2010. Print
Mills, Robin. The Myth of the Oil Crisis: Overcoming the Challenges of Depletion, Geopolitics, and Global Warming. Westport, Conn: Praeger, 2008. Print.
Rajagopal, Deepak, and David Zilberman. Environmental, Economic and Policy Aspects of Biofuels. MA: Now, 2008. Internet resource.
