The World Surrounding The Oil Industry

The consumption of the oil cause changes in the supply and demand. The United States produces 11 million barrels of oil every day. We are one of the biggest countries to have a big influence on the production and prices of the oil. The basic supply and demand theory explains that the if a product is produced more, the cheaper it should sell. If a country were to double the output of oil day, prices would fall and the Production is high, but the distribution of oil isn’t keeping up with the market. The United States builds an average of one oil refinery per 10 years. This is a net loss due to the fact construction has slowed down since 1970s. Since 1970s, the United States has 8 less oil refineries today. The reason why we are not oversupplied with cheap oil is because of the other countries’ higher net margin and the only operate at 62% of their capacity. Excess capacity is only there to meet future demand. With demand moving accordingly, oil prices will continue to be set mostly by the market — despite external players’ best efforts. (McFarlane)

The article entitled “4 Reasons Why the Price of Crude Oil Dropped” by Evan Tarver offer some of the possible reasons. According to Tarver the strength of the US dollar could be one of the reason for drop in the oil prices. Tarver also reveals that Organization of the Petroleum Exporting Countries (OPEC) is unwilling to stabilize the oil market and this has an effect on the oil prices. Other reasons identified in the article include the oversupply of the crude and the declining of the demand.

Until the above said period, the OPEC countries were the main producers of the natural oil and they worked as the cartel and they determined the quantity to be produced based on the market demand and they kept the price at a higher rate and prevented the fall of the price by reducing the production of oil. The introduction of the shale oil made the problem. The higher demand and lower supply of

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.

markets since December of 2000, when the Commodities Futures Modernization Act removed it from the items regulated by the Chicago Mercantile Exchange and C.F.T.C. Without control, the price swings in step with the actions of speculators that do not take delivery of the commodity, but wager on the price of future delivery and then sell the contracts if the markup is positive for them. With so many players in the futures markets, the actual users of the commodity are forced to buy the oil on long-term contracts that allow them to benefit from economies of scale, by the size of the purchase, and they get a hedge against inflation by purchasing well in advance of their actual need. Industrial users of oil and its derivatives make contract purchases to lock in a level of supply for their needs, but whenever there is a spike in the price of oil, the industrial users will claim that the spike forced them to raise their prices. We gullibly believe it and some of us pay more and some of us stop buying. The present group is small, and nonexistent when it comes to gasoline purchases. We are addicted to our cars and driving, thus we know the link between oil and gasoline, and we are quick to accept that OPEC raised the gas price theory on the evening news. This long narrative is to tell you that as you look for the shift in the equilibrium point of price to demand, understand that the movement is human nature and not actual market forces. Honest price changes convey information about the product or its manufacture, or its shipping cost, or if a tariff has been imposed. In every case, the data is an honest statement of the burden of material or labor or transport or taxes that has been revealed. With oil, there are too many liars inputting data into the price system for their own benefit. The worst feature of oil is that it is priced by cartels and by speculators and that only by hedging our purchases can we stop the

What is causing the sudden decline in oil prices? A. There is an increase in the supply of oil but the demand has decreased due to interest in energy efficiency. a. The production of oil in the United States has doubled in the last several years (Krauss). b. The price for a barrel of oil is around $30 dollars compared to over $100 in 2014 (Bowler).

This global phenomenal threat has repeated itself many times throughout the centuries when it was first discovered. William Tammeus, writer of the (The Globe and mail) has stated that “Oil prices have fallen lately. We include this news for the benefit of gas stations, which otherwise wouldn’t learn of it for six months.” This ironic statement reflects on the oil company’s desire to capture more value from the market by simply delaying its price communications.

The oil price collapse between June 2014 and January 2015 was the third largest of the past 30 years and was driven by a combination of few conditions. (Kose, Ohnsorge, Stocker, 2015). It fell by about 50 percent between those periods and consisted of several phase. Initially, in June 2014, the oil price of Brent oil drops from $110 per barrel to $80 per barrel before the OPEC meeting in late November. The second phase of oil price drop occur in the early of January 2015, where oil price drops to below $50 per barrel. This drop however was recovered slightly on May 2015, when oil price rise to about $65 per barrel. After the OPEC meeting, the price of oil was adjusted rapidly to about $70 to $75 per barrel, and have remained between this price value until January 2015 (Husain, Arezki, Breuer, Haksar, Helbling, Medas, Sommer, and an IMF Staff Team, 2015). (Figure 1) (See Apendix A for more information regarding oil price drop)

Supply surplus vs. demand was not the only reason which reduced the oil prices but also liquidity transferred back to capital markets (unlike 2008-2009 when the liquidity provided by FED was transferred to the oil market and caused a surge in

The scarcity of oil offering but, together with the increased global demand, certainly play their part to the recent price increases on world markets. Only recently climbed the price of a barrel of crude oil to over 100 U.S. dollars, an increase to 120 dollars per barrel no longer seems excluded. The price of oil to the U.S. gas stations since 2004 is even more than double.

Overall, we can see that the following changes in both supply and demand curves have affected the price of crude oil, because if the oil producers were to sell oil at the same price as before, then by the law of supply and demand, there would have been a surplus of crude oil. Therefore, the prices fall to equate quantity supplied with quantity demanded. Coming back to the prices of petroleum, we can see that, given that the demand for gasoline has remained the same and the supply has increased, by the law of supply and demand in order to meet the market equilibrium the prices should fall and the quantity should increase. This is true, as we can see from the news item.

Over the past few years oil prices have been dropping. According to the U.S. Energy Information Administration (eig.gov), a barrel of oil cost $86.07 on October 20, 2013. As of October 20, 2015 a barrel of oil sold for

Over the past year oil prices have dropped significantly. This is mainly due due to an increase in technology, which has allowed for a significant increase in the production of oil. The United States whose top import is Oil has started to produce more oil domestically. Oil prices have dropped from $110 a barrel of WTI to a whopping $41. This reduction in the demand for oil would usually curb supply, but many countries are afraid to curb supply incase of loosing market power. Another reason prices are dropping is people are being more environmentally conscious and reducing there oil use. In recent years we have seen many alternative fuel sources introduced into the market and people seem to gain utility from “going green” even if it cost more. The reduction in oil prices is heavily affecting economies that are reliant on oil exports. Oil prices, which continue to drop, are negatively affecting the GDP of countries who are reliant on oil exports. This drop in prices is can be simply by supply and demand there is most evidently a higher supply of oil then demand has brought prices down. Since the oilrigs have already been drilled countries rather sell oil at a loss then not sell any oil at all, so that some of the money can be recovered. This means countries are choosing not to curb the supply but continue to produce even though the market price is so low.

There are several factors that can effect the supply and demand for Crude Oil including OPEC and any rules and regulations they may set for trade, the ever changing inventory of oil as some countries are experiencing depletion and new countries are finding oil. There is also the relationship you hold with the country if you are an importer you must maintain good relations and if you are an exporter the ball is in your court as to how you decide to trade and also OPEC will often get involved if the country is involved.

One of the main reasons is the mismatch between the demand and supply of oil. Due to sluggish pace of global economies, the demand has been reducing. The other more important reason is tremendous increase in production levels by the oil extraction using Shale Gas formations in wells of Texas and North Dakota. When the oil prices were at $110-115/barrel, they drilled oil from shale gas formations which was earlier considered unviable due to low profit margins. This drilling has resulted into a supply glut which is further helped by Saudi Arabia and OPEC who are reluctant to decrease production.