Oil Prices: Demand and Supply

More often, higher oil prices falter the overall global economy. While exporting countries may enjoy the returns on transactions, importing countries, especially the net importers, largely suffer the consequences of high petroleum prices thereupon slowing down the deelopment of the global economy. The impact of high oil prices on importers and the entire world economy cannot be underrated as they adversely affect the growth of the importing economies in various ways. For one, with a rise in oil prices, commodity cost also rises signalling bad times for the recipient economies (Yépez-Garcia and Dana 90). Commodities such as food are dependent on oil for transport and shipment

The demand of gasoline has increased steadily over the last twenty years. In 1981 the U.S. averaged 6.5 million barrels of gasoline consumption per day. By comparison, in 2004 the U.S. averaged 9.2 million barrels of gasoline consumption per day. For most of this time period, gas prices stayed relatively the same. This is because the U.S. refineries increased their production to meet the demand and maintain the equilibrium price. Also during this same time period worldwide demand for crude oil increased 27%. Crude oil producers also increased their production to meet the demand keeping prices the same.

The United States consumes more than 25% of the world’s petroleum products which is a large percentage, considering only 3% of the world’s oil reserves are produced by the United States. Given the demand for petroleum products such as gasoline, understanding why Crude oil prices have skyrocketed in recent years, is not hard. According to the article “Ending America’s Oil Addiction,” the surge in crude oil prices can be reduced in large part to the simple concepts of supply and demand. (Cooper, 2008)

United States domestic production has nearly doubled over the last several years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep pumping. There are signs, however, that production is falling in the United States and some other oil-producing countries because of the drop in exploration investments. But the drop in production is not happening fast enough, especially with output from deep waters off the Gulf of Mexico and Canada continuing to build as new projects comes online. On the demand side, the economies of Europe and developing countries are weak and vehicles are becoming more energy-efficient. So demand for fuel is lagging a bit.

This report will consist of the causes and consequences of the changing price of WTI crude oil and recent trends in the global price of oil. It will also include the effects of the ever-changing price of oil on individuals, business firms, governments and the economy.

Oil prices hike or drop is normally a major concern to researchers, industries as well as the government. Oil majorly affects the operations of all sectors of economy in any nation. From analysis and monitoring of oil prices, it has been observed that oil prices went down from the second half of 2014. This was unexpected because oil prices had stabilized for about four years with each barrel costing 105 US Dollars (Miller 11). According to a research and simulation done by researchers in 2014, there was a prediction speculating oil prices would remain low in 2015 and marginally rise in 2016. However, in 2015 there has been a very sharp decline of oil prices. It is out of this concern that this papers the aims at addressing the following questions.

Fuel costs can change rapidly, making it difficult for consumers to adjust to the system. In fact, the petroleum industry is one of the

Since 2008 many oil companies in the US have been selling 3.5 million barrels more than they did because the oil prices go up and down constantly. In New York the oil price has dropped nearly half in six months. Out of the 12 biggest oil producers in the world most all of them are in the Middle East because they don't have many jobs over there except drilling oil. The US is the biggest buyer of oil. China, Japan and then Western Europe are some other big buyers but they are slowly buying less and less. More oil is pumped than the world needs, that is why the prices of oil are going down. People that drive in vehicles are clicking their about this but oil companies are scratching their heads because they aren't making that much money.” Anytime

Graph 1 represents the major companies and nations which product crude oil. It also represents how the bent crude oil price has fluctuated from 2004 until 2014. From 2004-2008 it is evident that there is a steady rise in oil prices, from $35-$150 per barrel. Towards the end of 2008 it is evident that there is a significant drop in oil prices, from $150- $32 per barrel. This is due to the Global Financial Crisis (GFC) where the stock market collapsed on October 28, 1928, through this came the rapid decrease in oil prices. From 2009-2011 there is a steady increase in oil prices which was caused by the stock market repairing itself from impact of the GFC. In 2013 we are able to see declining oil

Comparing this to the world oil price in that same time period, there seems to be an overall positive relationship between oil price and imports and exports. The price rises about $50/barrel over three years until a sudden spike in 2007-2008, then drops dramatically before sharply rising again (Figure 2). The drop in total imports and exports in 2012 does not seem to be correlated with price, since there is an upward trend in price from 2009-2013. Aside from that year, it appears that there is an overall positive correlation between total imports and exports of oil and the price of oil, suggesting that because oil is an essential commodity, demand is much more inelastic than supply. Thus, imports rise when prices are high even though it is disadvantageous for importers because exporters are willing to provide a larger quantity and importers are less sensitive to price.

The United States is the largest consumer of gasoline in the world. Not only do we use more than any other country in the world, but our usage is almost twice as much as the second largest consumer in the world. We need gasoline to power our cars, boats, and the modes of transportation we use to transport the goods we produce from one place to another. But what determines the price we pay for this precious commodity? Gasoline is produced from the refining of crude oil. We import and produce oil by the barrel. One barrel of unrefined oil produces approximately 19 gallons of gasoline. The crude oil we import is a commodity, and the world market is what determines the price of these barrels of oil, along with demand. The world demand can be controlled in a couple different ways. First, The Organization of the Petroleum Exporting Countries (OPEC), which is an oil cartel whose members are some of the largest oil producing countries in the world, control the amount of oil that is put into the world market. By controlling the amount available they can control the demand from countries that mainly rely on this import. The

Thomas Edison invented the light bulb in 1879. The first oil well was drilled in Pennsylvania in 1859. Since those two historic discoveries, technology and industry have exponentially grown to a point of absolute necessity today. The requirement of energy and oil throughout the world grows with advancement. As developed countries, like the United States, Japan, China, and Canada, progress and grow in population, more demands for energy and fuel are created. Likewise, as less advanced countries bring themselves into the global economy, they will also have increased energy and oil demands. So then the question begs, where are the resources for these demands coming from and what options will there be for future demands? Given current needs

There are two primary factors influenced the market of energy: population and economic output (Exxon Mobil, www.exxonmobil.com). According to International Energy Agency (International Energy Agency, www.oilmarket.org) global oil product demand will rise up from 84.5 mb/d in 2006 to 86.1 mb/d in 2007, and in forecast for 2030 will grow 1.8% per year. The world oil prices are forecasted to decline from $68 per barrel in 2006 to $49 per barrel in 2014, then rise to $59 per barrel in 2030 ($95 per barrel on a nominal basis). Total world liquids consumption rises to 118 million barrels per day in 2030.

World oil demand is increasing as emerging economies need more energy to increase their living standards. Estimates, shown below, are that by 2030, China and India as emerging markets will import over 70% to 90% of their fossil fuel needs (1) . Coupled to a continued high and growing demand for oil, makes this a robust market for the next 30 years.

The price of Oil has inflated over the years as the fossil fuel is slowly running out, there has been a rise in prices as supply falls. When a commodity becomes scarce its price will rise. The price has also risen as demand has increased from countries like China who are producing more goods which are demanded by consumers.