Discuss about the Demand And Supply Of Oil And Factors That Affect The Demand And Supply Sides Of The Market.
Demand and supply of a commodity can be identified as the crucial factors determining the price of products. The mechanism of pricing can be controlled by demand and supply side of a product in a particular market. Significantly, several factors are affecting the demand and supply of a product in a target market (Zhang, & Zhao, 2009). Due to the change in demand and supply side of a commodity, price fluctuation can be noticed. In this particular study paper, the demand and supply side of crude oil has been evaluated determining the factors affecting the demand and supply channel of the commodity in the Australian market.
The selected article written by Uren (2016) has reviewed the current scenario of the global oil market and the leading factors controlling the falling oil prices at the international level. Notably, in a span of mere eighteen months, crude oil prices slipped from US$110 to as low as US$30 a barrel due to uncertainties in the global market and growth worries. In the discussion, a summary of the entire article has been presented to evaluate the factors affecting the demand and supply of crude oil. Besides, demand and supply graph has been drawn to conclude the market equilibrium price and quantity.
The identified article reflects the existing crude oil market and the growth aspects for the companies associated with the oil business. Precisely, the article evaluates that the output of finite oil resources has been maximum. As a result of the scenario, the price of the commodity is tumbling down (Uren, 2016). Due to falling oil prices, emerging nations are investing capitals in the energy sector. Therefore, the Australian Regulatory Committee has imposed strict limits on foreign investment. According to OPEC, the slump in the crude oil price is not permanent. Meanwhile, due to massive output of oil and technological improvement, the price of oil will remain under pressure for a while.
The demand for oil can be affected by a number of factors leading to price volatility. First of all, growth aspects of global economies have largely contributed to rising in demand. If the leading economies are performing well, the demand for oil will automatically increase. Secondly, speculative buying from the emerging nations has influenced the demand side of crude. Thirdly, the changes in the financial market have a significant impact on demand for oil. A sound financial market can improve the demand for oil (Bolle, 2011). Fourthly, the Non-OEDC demand can contribute to the demand side of crude oil. The rise in consumption in the Non-OEDC countries can increase the demand for oil products.
Similarly, the supply side of crude is also influenced by several factors. Most importantly, the crude output decision made by OPEC can be the leading factor affecting the supply of crude. A cut in production of crude can reduce the supply fuelling the price to surge. Secondly, a future reserve of oil can make a massive impact on the supply of crude oil. Alternatively, the rise in demand from the leading oil-consuming nations such as the USA, China, India, and Japan, etc. can increase the supply side of the commodity. Lastly, geopolitical issues and concerns can be identified as one of the biggest factors affecting the supply side of crude. For instance, a war situation in a major oil producing country can reduce the supply of oil fuelling the price of the commodity.
According to Uren (2016), the demand for Oil is reducing due to the development of technology and introduction of electric and bio-fuel cars. On the other hand, the fall in the demand for oil in the international market is resulting in the oversupply of oil in the Australian market (Adil, 2016). A diagram has been presented below for better understanding:
Figure: Demand and Supply curve
Source: (Parkin, 2014)
It can be seen from the above diagram, the fall in the quantity demanded for oil has resulted in a leftward shift in the demand curve from D to D1. On the other hand, the oversupply of oil in the global as well as Australian market has resulted in a rightward shift in the supply curve from S to S1. Hence, a huge fall in the price of oil can be evident without affecting the quantity demanded or supplied due to the shift in the market equilibrium from E to E1.
Meanwhile, it is important to note that there is almost no change in the quantity demanded or supplied of oil due to the inelastic demand of fossil fuels (Pirog, 2008). Irrespective of the developing technology and shift in the demand curve, the vehicles that are already in the market needs fossil fuel (Ravindra, & Iyer, 2014). On the other hand, the developing technology is further controlling the growing demand of oil in the market irrespective of the falling price of fossil fuels. Therefore, a minimum change can be evident in the quantity of consumption of oil (Bochet, ?lk?l?ç, Moulin, & Sethuraman, 2012). In other words, the inelastic demand of oil has resulted in the shift of demand and supply curve, but has resulted in no or little change in the actual consumption of oil.
Figure: Inelastic demand of Oil
Source: (Parkin, 2014)
It can be seen from the above diagram that a change of 30 percent in the price results in the change of only 10 percent in the quantity demanded for oil. Hence, the elasticity of demand for oil is less than 1, which states that oil has an inelastic demand.
By considering the above analysis, the development of technology and alternative energy sources has resulted in the fall in the demand for oil. On the other hand, the falling demand for oil can become a major challenge for the oil producing organisations across the globe. Meanwhile, it will result in a price war in the global oil market. Hence, it is important for the government of different countries to take necessary steps in order to control the demand and supply of oil to stop the price war in the oil and energy sector for maintaining an economic balance in the nation.
Adil, J. (2016). Supply and demand (1st ed.). Mankato, Minn.: Capstone Press.
Bochet, O., ?lk?l?ç, R., Moulin, H., & Sethuraman, J. (2012). Balancing supply and demand under bilateral constraints. Theoretical Economics, 7(3), 395-423.
Bolle, F. (2011). Competition with supply and demand functions. Energy Economics, 23(3), 253-277.
Parkin, M. (2014). Economics (1st ed.). Boston: Pearson.
Pirog, R. (2008). Gasoline and oil prices (1st ed.). Washington: Congressional Research Service.
Ravindra, K., & Iyer, P. (2014). Decentralized demand–supply matching using community microgrids and consumer demand response: A scenario analysis. Energy, 76, 32-41.
Uren, D. (2016). Oil to burn but demand is dying. Theaustralian.com.au. Retrieved April 2017, from https://www.theaustralian.com.au/business/opinion/david-uren-economics/oil-to-burn-but-demand-is-dying-as-technology-improves/news-story/22edee003d303ee677161471f4f441af
Zhang, X., & Zhao, Y. (2009). The Impact of External Demand Information on Parallel Supply Chains with Interacting Demand. Production And Operations Management, 19(4), 463-479.