Oil Economics Essay

3274 Words14 Pages
“If an epoch is to be identified by its most essential material, ours will have to be called the Oil Age. Oil has become the major fuel and probably the most indispensable raw material of contemporary industrial civilization. On the demand side are the large industrial economies of the west, together with Japan, China and India as primarily oil-consuming nations. On the supply side is a small group of developing countries, namely Arab that produces and exports almost all their production. Oil pricing involve complex issues of economics, but they are by no means wholly determined by the market.” (Fawn & Hinnebusch, pp. 247 - 248) The most commonly used theory is the mainstream economics to relate to a price of a good which applies that everything that all the players in the game are rational thinkers and have full knowledge of the markets and have full information. It also states that the goods and services bought and sold are utilized to their maximum. (Perman & Scouller, 2008) The main concepts of mainstream economics are: • Demand and supply • Market forces • Price Elasticity These concepts can be used in order to see the change in world oil prices but it does not give a definitive answer as to why it happens. Given below is the graph showing the oil price changes since late 2005. Figure 1 (Appendix A) The recent and dramatic rise in world oil price is due to various reasons other than the normal market forces of demand and supply. Though the demand and supply play an important role in pricing the commodity there are various other factors to it. The factors effecting oil prices are as follows: 1. Demand 2. Supply 3. Price elasticity 4. Declining US Dollar 5. Market speculators 6. OPEC’s failure 7. Other Factors The world oil market demand has been growing since 2005 and continued into 2006 till 2008. The demand of oil has been rising
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