Examine the Factors That Determine the Price of Oil in the Market. How and to What Extent Could Government Policies Affect Oil Prices?

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An Economic Analysis of the
Current Oil Market & Prices

PREPARED BY: Teoh Chern Shi

ID NO: B0075JMJM1112
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SEMESTER: Semester one

LECTURER: Ellie Semsar

DATE: 20th February 2012
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* Table of Contents
Table of Contents2
1Objective3
2Introduction4
3Analyze Current prices of oil5
4Factors determine the price of oil7
4.1Demand and Supply7
4.2Exchange Rate9
4.3Location9
4.4Government policies affect oil prices9
5Factors that Determine Market Oil Demand10
5.1The price of the main product10
5.2The price of other product11
5.2.1Substitutes11
5.2.2Complements13
5.3Income13
5.4Population14
5.5Preference14
5.5.1Seasonal changes14
5.6Future price expectations15
6Factors that determine Market Oil Supply16
6.1The price of main product16
6.2The price of other product17
6.2.1Substitutes17
6.2.2Complements18
6.3Prices of factors of production used to produce the product18
6.4Technology19
6.5Number of producers19
6.6Future price expectations19
7Conclusion20
8Bibliography21

Figure 1: Current Oil Price (OilPrice, 2013)5
Figure 2: Crude oil price from Feb 2012 to Feb 2013 (OilPrice, 2013)5
Figure 3 Historical Oil Prices Chart for 10 Years6
Figure 4: Demand and Supply curve7
Figure 5 Top ten net oil importers 2011 (EKKA, 2012)8
Figure 6: Inelasticity in demand to price changes9
Figure 7: Demand curve movement up along10
Figure 8: Demand curve movement down along11
Figure 9 Demand Curve shift rightward12
Figure 10: Demand Curve shift leftward12
Figure 11: Supply curve movement up along16
Figure 12: Supply curve movement down along17
Figure 13 Supply Curve shift leftward17
Figure 14 Supply Curve shift rightward18

Objective
The objective of this report is to apply the theory we learn from the subject ‘Business Environment’ into the real oil market. We will know well how the inelastic product response when demand and supply change in the market. Besides, the report analyzes the important factors affecting the price of oil in the market, and how the government policies affect oil price in the market.

Introduction
Oil is the heaviest traded product in the world. The oil said here are including gasoline, diesel, kerosene, heating oil, fuel oil, and others. Many countries are dependent on oil to produce their energy and manufacturing industries.

The current oil price and the future price expectation will be discussing. The main concern in this report is to examine the factors that determine the price of oil in the market, including demand and supply, exchange rate, speculation, and etc, the effect are shown in a diagram clearly, some example will be given as well.

Besides, we analyze how and to what extent government policies could affect oil prices in the report too.

Analyze Current prices of oil
The demand of global energy is increased 50% in a generation, in the result as supply struggling to fulfill such a high demand, the price of oil increased dramatically.

The table below shows the current oil price in the market:
Oil| Price/ barrel (USD)|
Crude Oil| 97.75|
Crude Oil Brent| 118.66|
Gasoline| 3.0732|
Heating Oil| 3.2311|
Figure 1: Current Oil Price (OilPrice, 2013)

Figure 2: Crude oil price from Feb 2012 to Feb 2013 (OilPrice, 2013)

From the chart above, we can see that the price of oil increasing from end of December 2012 to February 2013, and a slightly dipped in early February. This is due to many Asian markets shut for Chinese New Year holiday in Asia. The rise may go peaked in April then headed downward trend as last year.

The rising of price of oil is caused by variety of reasons, for example a snow storms in the...
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