Supply and Demand of Oil

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Demand refers to how much (quantity) of a product or service is desired by buyers. If we demand for something, then we will want to have it, can afford it and plan to buy it. Quantity demanded of a good and service is the amount that consumers willing to buy at particular time period , and at particular price. While supply represents how much the market can offer. In another word, the quantity supplied refers to the amount of a certain good producers are willing to supply at certain price level. The interaction of supply and demand curve in the market will determine the price of the goods or services. Graph 1 shows the price of oil in real and nominal value over time from May 1987 to Jan 2011. There are few factors that influencing the demand for oil. Firstly, the size of population. An increase in the population increases the demand for all goods. Given the increasing rate of population growth in China and India, there is the potential for a very rapid increase in demand for oil, especially if we do not find alternative energy sources such as nuclear power, biofuels and solar energy. This leads to shift of demand curve to the right and leads to increase in price, ceteris paribus. Graph 2 shows the effect on incresing in population that leads to shift of demand to the right. The supply is inelastic because it is hard to expand the production of oil in the short run due to it scarcity. This will push the price from P1 to P2 and quantity will increase slightly from Q1 to Q2. Secondly, economic growth which leads to increased use of oil. For example, China is one of the country that is highly industrialised. More people demanding for oil in their domestic usage such as operating the plant, factories and vehicles. A recent report published by the National Petroleum Council (NPC) in the United States predicted a 50–60% growth in total global demand for
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