Examine the Factors That Determine the Price of Oil in the Market. How and to What Extent Could Government Policies Affect Oil Prices?

3231 Words May 27th, 2013 13 Pages
An Economic Analysis of the
Current Oil Market & Prices

PREPARED BY: Teoh Chern Shi

ID NO: B0075JMJM1112
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SEMESTER: Semester one

LECTURER: Ellie Semsar

DATE: 20th February 2012
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* Table of Contents Table of Contents 2 1 Objective 3 2 Introduction 4 3 Analyze Current prices of oil 5 4 Factors determine the price of oil 7 4.1 Demand and Supply 7 4.2 Exchange Rate 9 4.3 Location 9 4.4 Government policies affect oil prices 9 5 Factors that Determine Market Oil Demand 10 5.1 The price of the main product 10 5.2 The price of
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(Worldoils, 2012)

Figure 3 Historical Oil Prices Chart for 10 Years

From the chart above, we can see that the price of oil increasing from 2002 to 2008, and face a dramatically drop in 2008, and face an increasing trend onwards. The drop in 2008 due to the slow economic growth and reduce the consumption of oil around the world.

Factors determine the price of oil
There are variety factors determine the price of oil, it’s including quantity of demand, stability of supply, currency exchange rate, location and government policies.

Demand and Supply P
Price of oil (USD)
Q
Quantity
(Gallon)
Oil Market
Supply Curve
Demand Curve
Q1
P1

Figure 4: Demand and Supply curve

The main factor that affects the price of oil in the market is supplies and demands. “An Oil market is like a global auction, the highest bidder will win the supply. When the demand is high and the supply is low, the bidder needs to pay higher price to buy the oil; when the supply is abundant over the current demand level, the bidder will wait and purchase at the lowest price as possible.” (Khodorkovsky)

Besides, due to the rapid economic expansion in some country like China, Brazil, Russia and India, the demand for oil product is increased dramatically. “Global oil consumption grew by a below-average 0.7% per day.” (BP, 2012) This lead the price of oil grows up every year.

The chart below shows the top ten
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