Lower Demand Drives Down Price Of Oil

536 words - 3 pages

This article is about the shortage of supply (oil) which raises the oil prices in the market. Through this, we can clearly see that this article divides into two parts, the decrease in oil supply and the demand for the oil.The International Energy Agency had sensed the future shortage for heating oil so they set a record price of $100 a barrel in to order decrease the demand because “…….record prices would erode fuel use.” Supply is the relation between the price of a good or service and the quantity that firms are willing to sell (1). Demand is the willingness and ability to purchase a commodity or service (2). There are a few factors that may affect the demand to ...view middle of the document...

The initial price of the oil was at P1 and the quantity demanded was at Q1. However, because of government intervention, the price of the oil in the market increases from P1 to $100. This causes the quantity demand to decrease and the demand curve to shift to the left from D1 to D2 while the supply curve stays the same. There are also government interventions on the oil supply ,“demand for heating oil…. has dropped by about half since new U.S. government rules took effect this year that prohibit …..nonhighway vehicles from using the high-sulfur fuel.Elasticity is the ratio of the proportional change in one variable with respect to proportional change in another variable (3). Price elasticity of demand is the responsiveness of demand in a changing price. Oil is a rather inelastic good, so for price elasticity of demand, the cost decreases along with the falling of the price. The graph below shows the relatively inelastic demand for oil.Oil is an essential good which is required in almost every production of service including transport, production etc. and in fact this resource has very few substitutes. Therefore, there would be not much difference even if it was the long run or short run. If the record price does not decrease, this may interrupt the growth of the society. Even if the price of oil rises, the consumers income will still stay unchanged. So the consumers still have to buy the good except they have to pay a much higher price to buy a lesser amount of oil. We can solve this problem by increasing supply by using some of the governments reserves.http://www.iht.com/articles/2007/11/13/bloomberg/bxcom.php#end_main

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