Topic: "Oil Price Fluctuation: Cause For Economic Panic"

1019 words - 4 pages

The purpose of this paper is to describe why oil prices fluctuate, as well as, impacts of supply and demand on the commodity of crude oil. Is the price of crude oil truly a "supply and demand" problem or is it backlash from the Middle Eastern countries? Will the fluctuating price of crude oil cause global economic panic?The one key reason why oil prices have fluctuated the way they have in the last 30 years is due to political instability in the countries which we obtain the oil. There is no pattern in the change of oil price during this time; the only difference is to what the current climate is in the particular countries. Furthermore, natural disasters help in the fluctuation of oil prices. An example of oil production disruption due to natural disaster is hurricane Ivan in 2004 which severely affected the production in the Gulf of Mexico, therefore causing an increase in oil prices.Another reason for a fluctuation in price has to do with the shift in demandcoming from China and other developing countries; with real gross domestic product growing at a rate of 8-10% a year. China's need for energy is projected to increase by 150 percent by 2020. To sustain its growth, China requires increasing amounts of oil. Its oil consumption grows by 7.5% per year, seven times faster than the U.S' (Gal, L.).This increased demand from China would typically result in an increase of supply; however OPEC has restrictions on the supply of oil and does not want to overproduce. Over production could cause prices to fall rapidly. Over-supply is not the only reason there is no shift in supply. The main reason for no increase in supply, is that most all the worlds' refineries are working at maximum capacity. These factors are some of the reasons, why in recent times the price of oil is increasing,When demand is greater than supply, and supply is struggling to increase, the result in the market is never being in an equilibrium price and quantity position and would therefore explain why prices are still in flux.The supply for oil would be elastic if the reserves were there to cope with the increase demand and increase prices. However the demand for oil is inelastic as there is very little change in demand when there is a price rise, as oil is necessarily good for millions of firms worldwide and therefore until an alternative is found they haveto pay the increase oil price. Oil prices would maintain a steady enough shape if the world could be certain of the future.A prime explanation why oil prices have fluctuated in the past is simply there is no market confidence and the uncertainty around future supply; and all of which drives the price flux. There are many uncontrollable factors in determining the future price of oil but the trends due suggest the future pattern of short term rise in price. Prices will continue to rise as demand increases mainly due to China's increasing demand and the fact oil production is expected to slow down in the next 30 years then this will...

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