Monday 16 February 2009

World Oil Market!

As any other market,oil market has two main price determinants:supply and demand.

The supply of oil should be examined in two ways:short- and long- run. 
The short-run supply is affected by:

  • Motives of oil producers.

It is obvious that not all countries have enough oil to maintain their needs so there are countries that export oil.

Some of these exporters decided to make an ally to maintain oil prices. So in 1961 OPEC started to operate. OPEC's declared mission is to coordinate and unify the petroleum policies of Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital to those investing in the petroleum industry. OPEC nations still account for two-thirds of the world's oil reserves, and, as of March 2008, 35.6% of the world's oil production, affording them considerable control over the global market.

And actually they really DO control price because now it seems to be quite low. 

OPEC is not the only organisation that can influence Oil Prices but the next largest group of producers, members of the OECD and the Post-Soviet states produce only 23.8% and 14.8%, respectively, of the world's total oil production so they do not have that market power compared to OPEC. 

  • Oil stocks. 

Some countries sometimes accumulate oil and when oil price goes up release it to the market to change supply.

  • External shocks of production.

As you can see on this graph there is an obvious correlation between Mid-east conflicts and high oil prices.(For example Iran-Iraq War in 1980s or Iraq war in 2003). This fact is easy to explain because demand tend to be inelastic(most of the time) and so even small decrease in supply will increase price.

The Long-Run Supply of Oil is mostly affected by:

  • Oil reserves.

You can't produce oil without actually having it(Economics is so obvious sometimes,isn't it?). So now many countries are looking for new oil fields but oil is not an endless or renewable resource so many scientist suppose that in some years most of the oil exporting countries will have a decline in production. This theory is also known as the peak-oil theory.

 (Also video available)

  • Technology.

Some of the oil reserves are already researched but they cannot be extracted because of hard soil or rocks so improvement in technology may increase long run supply.

It was written above that demand for oil "tend to be inelastic" but that is not always true.Demand for oil is obviously a derive demand (because people buy oil not just to have oil but to produce something). 
Oil is usually used in:

  •  Gasoline: used in motor spirit/petrol
  • Middle Distillates e.g. diesel - used in vehicles and other motors/engines and jet fuel
  • Kerosene - cooking/heating
  •  Heating Oil
  •  Fuel Oil: boiler fuel for industry, power and shipping
  •  Other: lubricants, bitumen etc 

So increase of demand for any of that goods(for any reasons,for example increase in the price of substitute) will increase overall demand for oil.

I think it's also important to mention that demand for oil is also influenced by:

  • Economic cycles.(When there is a recession the demand for oil goes down)
  • Rising living standards.(During past decades there was a great increase in living standards in many countries,especially in China and USA) 
  • Changes in climate. This can also affect demand for oil,because if it is getting colder then people (and machine) are likely to use more fuels.
  • Market speculations. As in any other market speculators(people that want to make profit because of the changing in price) may increase demand and therefore increase price. 

Facts given above show obvious things. Now the main question of this post.

How can the oil price go down BY MORE THAN 70% IN 6 MONTHS while consumption decreased ONLY BY A BIT MORE THAN 10%!?Answer in comment please.



6 comments:

  1. Sorry but your english sucks!

    ReplyDelete
  2. Hahahaa..........Dima Dima Dima....Agree...!!!Kekekeke

    ReplyDelete
  3. Don't say that every body!!!I like your writing...heheeh

    ReplyDelete
  4. Dimka,sorry,but your english is not perfect as well,so,please,be polite.Anyway, nobody here has answered the question yet.

    ReplyDelete
  5. The percentage of consumption doesn't affect too much on oil prices.Prices have decreased because of current world crisis and increasing in supply. World oil production was up 2.5 percent in the first quarter of 2008 over the same period in 2007 while world oil consumption rose by just 2 percent.
    In fact, demand is falling in some countries.So supply is up; relative demand is down and yet, the price of oil is soaring.
    So why is that? There are some possible reasons: weak dollar, another third on geopolitical uncertainty, and the rest on market speculation.

    ReplyDelete
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