Summary of the WSJ article
The article by the Wall Street Journal illustrates the drop in oil prices over the years in the United States and the global market. According to the article, the oil market is not attractive to investors all over the world due to the dropping prices of fuel over the years. Oil prices have dropped significantly to settle at very low prices per barrel. The US economy currently regards oil as one of the worst performing commodities in the country which is unlike the previous years where oil was one of the most profitable investments. According to the article, the prices of oil have dropped from $100 a barrel to $37.28 a barrel. The drop shows a loss for companies dealing with oil and gas in the country.
On the other hand, the article looks at the cheap oil as a direct benefit to the consumers who are the drivers of the United States. The impact of the drop in oil prices is also experienced in the financial markets where oil and gas companies experienced a drop in their share price since their stock is devalued according to the article. The article also explains that the drop in the oil prices have affected the financial markets of the oil driven economies such as Saudi Arabia. The article also notes that, there are still expectations of oil price drops within the years which will continue affecting the global oil suppliers in the world. The recent uplift of the sanctions placed on Iran will also see thousands of barrels of oil flood the market for sale further creating an oversupply of oil in the global markets.
Application of price theory on the article
The article has covered two topics of price theory that are looked at by Browning and Zupan. The topics covered include; consumer behavior and competitive markets.
Consumer behavior
The drop in oil prices have seen consumers feeling relieved since they can save the extra money that they used to spend on fuel. The article has quoted that the drop in oil prices has seen the US consumers who are the drivers benefit from the low prices directly. The consumer behavior patterns are influenced by prices of goods. When the prices of goods are low, consumers save more to spend the money on other products they deem are important.
With the low fuel prices, consumers are moving into purchasing more vehicle that consume higher volumes of fuel. Additionally, consumers are moving to save money and invest in other ventures as well as service debts. If the trend continues until the next year, there will be increased spending on other products by the US consumers due to the huge savings they make from the low oil prices.
Competitive markets
The topic on competitive markets is well illustrated throughout the market. A drop in oil prices point out to the market forces. Oil is just like any other commodity when subjected to the market forces. Oversupply of oil in the market means that there are new entrants into the market that are looking to supply oil. The new entrants provide competition for the market share since they also provide their product into the global market. As a result, there is a high supply of oil amidst a low demand.
The oil market initially was largely controlled by the OPEC cartel organization that looked to control the prices. The organization acted as a single monopoly that controlled the market prices of oil. However, the entry of the United States into the market and other countries provided stiff competition to the cartel. As a result, there was over supply of oil and a drop in oil prices in the long run.
Relation between this topic and what was stated in class
As per the article, we can deduce that there is a very low demand for oil. This is probably because the consumers demand less of the oil. It is with this reason that the price per barrel is fetching very little amount of money. Several concepts will be looked into in regards to the topic under study. For instance, the concept of consumer preferences and in particular studying demand curves. A demand curve is a curve that shows a consumer’s preference when comparing two commodities. The reduction in prices of the oil advantageous to the consumer because they will spend less per barrel of oil unlike when compared to another product. Therefore, when plotting a demand curve, you will notice that as the price of oil drops, there will be an increase in quantity of consumption. Therefore, this will imply that the demand curve will shift to the left.
A decrease in the prices of oil will also imply that the consumer’s income has increase. Therefore, the consumer is in a better position to buy more of oil at a reduced price when compared to the initial high prices in oil.
New entrants into the market played an important role in ensuring the oil prices reduced. The more the players in the market, the stiffer the competition and thus the need to reduce the oil prices so as to ensure that the parties involved can attract more customers. It is because of this competition that the consumer benefits. Initially, the pricing by the OPEC organizations was high because this organization controlled the supply of oil. With the new entrants into the market, the market forces kicked in hence the stabilizing of the oil prices.
Price theory insight of the situation
The price theory explains comprehensively about the situation in the global oil market. According to the price theory, the entrance of new countries into the global oil market to supply oil to other countries the commodity flooded the market. Competitive markets theory explains how a fairly competing market can lead to consumer satisfaction. Initially, the prices of oil were high and the oil and gas companies used to reap huge profit margins. However, the consumers used to suffer due to the high prices that they had to incur to enjoy the luxury of the commodity. The market at this time was not competitive since it was controlled by an organization that acted as one supplier of oil thus forming a monopoly structure.
Entrants into the market such as the USA have seen drop in the global oil prices due to the ability to supply cheaper crude oil to countries which forced the OPEC countries to also drop their prices. The force is basically market competition which is a theory of price. The price theory has therefore provided an insight into the situation properly and the readers would understand the relations between the topic on price theory and the situation discussed by the Wall Street Journal article.
Works Cited;
Friedman, Nicole. "U.S. Oil Prices End 2015 Down 30% For The Year". WSJ. N.p., 2016. Web. 2 May 2016.
Browning, Edgar K., and Mark A. Zupan. Microeconomics: Theory and Applications. Wiley Global Education, 2014. Print.
