The paper 'The Real Price of Oil' is a perfect example of a Macro and Microeconomics Assignment. Factors that determine the global supply and demand for oil in the short and the long-run. The price changes of crude oil have a far-reaching effect in the international oil trade. The principle of supply and demand analysis is a way of understanding the interconnection between the macroeconomic consequences and macroeconomic of the oil market. Globally oil is the most heavily traded commodities and its price fluctuation has an important effect for oil exporters, producers, and many nations that depend on oil as a key input in their manufacturing, energy, and service industry.
There are several factors that determine global supply and demand for oil in the long run and short run. DemandOn the demand side, there is cyclical demand. This is the link between the rate of global economic growth and the demand for oil. This link simply exists because oil is an essential input into many industries. The demand for oil rises when the economy expands. This can be demonstrated in the case of the Chinese economy.
The fast growth in its output in the energy-intensive sector led to a surge in the demand for crude oil into the Chinese economy. The price of substitutes is also one of the major factors that determine demand. The price of oil substitutes relatively affects the demand for crude oil for example the market price of gas. The development of reliable and relatively cheaper substitute in the longer term, shift the demand of away from crude oil towards the emerging substitutes. A shift in the demand for oil was seen in the year 2004-2006 when the prices of oil were higher.
Researchers dive non-oil substitutes in an attempt to curb the rising oil prices. The problem with alternative sources of energy is that it takes several years to come through to affect the market for energy. Another factor that affects demand is a change in the climate. The demand for oil during winter is very high. Crude oil is used for heating workplace systems and households in Canada and USA economies. Market speculation is also another that determines the demand for oil.
Price speculation characterizes the oil market whereby purchasers hope for a rise in prices on the world market. This can be seen in the most recent spike in the oil prices where it features a high level of demand by hedge funds and other investors pouring into the international petroleum exchanges to buy up any surplus oil future contracts. Investors hope that by the time the contracts are ready to be fulfilled, they would have made a huge profit. However, it is important also to appreciate the fact that speculation is characterized by risk since prices can go down as well as up.
SupplyA good analysis of the global supply of oil can be made by distinctions between long term and short-term supply to the international markets. The supply curve for the short run is normally drawn on the basis of a given state fixed use of capital inputs and production technology and fixed use of capital inputs. For example, the oil industry supplying a given stock of capital uses machinery to extract that oil from a known level of oil reserves.
Short-run supplyThe daily supply of oil is characterized by inevitably short-run limits as production gets close to capacity limits, so the short-run supply of oil is more inelastic. There are a series of different factors that determine the supply of crude oil in the short-run. Among these factors are profit motive, space capacity, stocks, and external shocks. The OPEC countries came together with the ultimate objective to control a profitable price for crude oil. Their corporations have had a huge impact on the global supply of oil.
When they feel that the prices are not profitable they hoard the oil product which leads to an increase in the prices. The stock level is another major factor that influences the supply of oil. Major oil refineries are prone to hold a high current level of oil stock (inventories) for immediate supply. This high level of stock translates to extra oil supply when it is released on to the market quickly when the demands fluctuate. External shocks are also another major factor that influences the supply of oil.
A good example is the loss of output from rig disruption or closure of oil supply due to terrorist attacks or during war outbreak. Long-run supplyOn the long-run factors such as reserves, technology and exploration affect the supply of oil. The depletion of proven oil reserves is at a higher increase due to faster-growing demand. The supply of oil in the future is under threat if the recent is anything to go by. Similarly, exploration is a way to curve the anticipated future shortage of oil.
It has made a lot of sense for many nations to invest in exploring, identifying, and exploiting new oil reserves. This factor together with the enforceability of the future as resulted in mass hunting of oil. The exploration of the new reserves means an additional supply of oil in the market. Technology on the other hand as a factor that determines the supply of oil has played a major role in oil extraction. It has impacted the cost of production, refining, and extraction. More efficient in extraction, refining and extraction have advance ways in which oil is produced, process, and transport.
With the emergence of new technology, it has been accompanied by an increase in the supply of oil. View of the real oil price 2020The oil prices will be greater than $200 in 2020. This can be demonstrated through a number of situations that surround the production of oil. There have been consistent drought patterns that reduces the flow of major river systems across the world. If the latest patterns of climate are anything to go by there is a serious decline in the output of hydroelectric power.
This factor alone will magnify the demand for oil and it will result in the rise in prices to $200 by 2020. A good illustration of this can be seen in the case of China. It has suffered from one of its worst droughts ever. This led to a significant decline in hydropower and severe electricity shortages throughout much of central China. This made china to shift to burning more coal to generate electricity and the use of oil. Since then the demanding oil has been ever increasing and domestic mines no longer satisfy the country's needs, China has become a major coal importer and this move is characterized by continuous escalating prices.
Similarly, industries are relying more on diesel-powered backup generators, putting yet more pressure on global fuel prices. In light of the above discussion it possible that the price of oil in 2020 can rise to $200.
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