Oil Prices: Driven by Supply and Demand

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1. Oil prices are almost entirely driven by supply and demand. On the supply side, OPEC seeks to control the prices by virtue of controlling the output of its member countries, which are responsible for around one-third of the world's oil production (OPEC, 2012). That OPEC can do this is facilitated by the fact that bringing new oil production online takes a long time. Thus, by setting output on a monthly basis, OPEC can control the supply. OPEC's actions have a strong influence on prices because demand is largely predictable and incremental. The demand this month will be related to the demand next month, since oil demand tends to be for usage of a recurring nature. Over the longer-term, some of the major trends that affect the price of oil are consumption for business and personal use. For example, Anderson and Boul (2005) note that China's economic growth has resulted in that nation having steadily increasing demand for oil. Much of this comes from growth of the country's consumer class, with automobile sales, and from growth in industrial uses for oil. India, the US, and the world's modern economies are all big users of oil, so the drivers of demand in these nations can have an impact on world markets for oil. 2. According to Anderson and Boul (2005), the two largest consumers of oil products are the United States and China. China is one of the major contributors to the growth in oil consumption as well. 3. a. If the price of SUVs falls, this affects the demand
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