Supply and Demand - Example of Oil Price

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Group members Nguyen Dat Anh Ho Ngoc Son Nguyen Thai Ha Nguyen Thi Huyen Trang Luyen Trung Kien

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Wednesday, 2 January 2008, 22:36 GMT

What is driving oil prices so high?
Oil prices have hit a record high at $100 a barrel. Prices have doubled from the rates seen in January 2007 and more than quadrupled since 2002. What factors are causing this unremitting increase and what are the likely consequences for consumers and the global economy? What is causing the latest price spike? This was triggered by concerns about violence in Nigeria and Algeria as well as the delay of the elections in Pakistan. The assassination of the former Pakistani Prime Minister Benazir Bhutto increased oil prices because stability in Pakistan is important to US policy in the Middle East. Threats to oil workers and facilities in Nigeria have cast a long-term shadow over oil supplies from the world's eighth largest oil exporter. Suspected militant attacks on Wednesday in Nigeria's main oil city, Port Harcourt, heightened concern over the potential for further disruptions in shipments. "With the military and the militant warlords engaged in a violent tit-for-tat, the risk for oil disruptions in Nigeria remains higher than in the past few months," said Olivier Jakob of Petromatrix. The weak dollar, which makes it cheaper for importers to buy dollar-denominated oil supplies, is also a major factor. Is demand for oil continuing to soar? Yes. The biggest catalyst for oil's seemingly remorseless rise has been the simplest economic driver there is: the balance between demand and supply. Demand is at an all-time high, fuelled by the continued breakneck economic expansion of the Indian and Chinese economies. With more than a billion people in each country, and both economies growing fast, manufacturers and consumers are sucking in energy at an ever-increasing rate. China overtook Japan as the world's second-largest consumer of oil in 2003 and is closing in on the US, with demand for oil growing at about 15% a year. Analysts worry global demand for oil is so intense that supplies may not keep pace. Demand will rise by an average of 2.2 million barrels a day next year, the International Energy Agency says, compared with the 1.5 million-barrel rise seen in 2007. It says annual demand will rise 2% up to 2012, while other projections suggest demand could soar from about 90 million barrels a day to as much as 140 million over 25 years.

What is Opec doing about the situation? As the leading oil supplier in the world, producers' cartel Opec is under constant pressure to do something about the price bubble. It recently bowed to pressure to pump more oil, agreeing to raise its production quotas by 500,000 barrels a day from 1 November. Reports suggest the move was forced through by Saudi Arabia and that few other Opec members either have much stomach for increasing output or much capacity to spare. Opec has said the market is "very well supplied" with crude and will continue to be so in the immediate future. It has blamed speculation by market traders - who can make money by betting on the future direction of prices - for the continuing price rises. Critics of Opec say it must act more aggressively to bring prices down. "The response from Opec has been pretty poor so far," says John Roberts, an energy security analyst with commodities research firm Platt's. "The sentiment in the market is that it is time for Opec to increase production again." Who are the winners and losers from costly oil? Taking inflation into account, prices are still below levels seen in late 1980, when a barrel of oil - in today's prices - was worth more than $101. Back then, costly oil helped contribute to a recession in the US and similar fears are resurfacing now. The Bush administration has said it is "very concerned" about current price levels, at a time when the economy is already expected...
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