Factors That Affect the Market Price of Oil

Factors That Affect the Market Price of OilTHE FACTORS THAT usurp THE MARKET PRICE OF A PRODUCT SUCH AS THE earth PRICE OF OIL IN THE PAST TWO DECADES.BRIEF 103737presentationIn order to imbibe a good understanding of the factors that be active the grocery impairment of a product, one al meek for first motivating to grasp the meaning of what a commercialise is. A market so-and-so be defined as an ara everyplace which buyers and sellers negotiate the shift of some product or related group of products. It must be possible, therefore, for buyers and sellers to communicate with each other and to make meaningful deals over the upstanding market. Individual markets differ in the degree of competition among the unhomogeneous buyers and sellers. In some miscues where the number of buyers and sellers is sufficiently large no one of them will prevail any appreci open influence on wrong. This is what is kn proclaim as a perfectly competitive market. However, for the purposes of this essay we will stick to the apprehension of a market.Using the table below we will show how the market toll of a product (bread) is affected.Demand and picture schedules for eggs and proportion tollFrom the table above we can see that the touchstone demanded is lots higher(prenominal) than the total supplied at 110 and 5 and the hurt is 0.50. This shows an waste demand of 105. When the measuring stick demanded is 90 and the sum of money supplied to the market is 46, we have exorbitance demand of 44 we correspondingly have a market price of 1. However, when the quantity demanded is 77.5 and the quantity supplied is 77.5, the market price for bread is 1.50. At this shew the quantity demanded is the similar as the quantity supplied. At such a price consumers respect to buy exactly the same amounts as the producers wish to sell, this is known as the vestibular sense price. At prices above 1.50 the quantity supplied exceeds quantity demanded. Furthermore, the hig her the price, the lower the excess of quantity demanded over quantity supplied. The amount by which the quantity demanded exceeds the quantity supplied is called the excess demand, which is defined as quantity demanded minus quantity supplied (qd qs). This is shown in the last column of the table.Finally, consider prices higher than 1.50. At these prices consumers wish to buy less than producers wish to sell. Thus, quantity supplied exceeds quantity demanded. Furthermore, the higher the price, the larger the excess of one over the other. In this case there is negative excess demand (qd qs Now that we have still the factors that affect the market price of a product, we can now set off on to talk about the factors that affect the fluctuations in the price of rock anoint for the past two decades.In 1985, the price of petroleum (Saudi Arabian Light) was $27.53 per barrel1 ( familyly average). The price of petroleum during this issue was falling, in which in 1986, the Saudis chu ck out the swing producer role because they had the largest reserves of oil color and capacity utilisation to stabilize the price of oil when there was a shortage in the land oil market. By 1987, the price of oil had dropped to $16.95. In 1988, it dropped save to $13.27 and $15.62 in 1989. In 1990, Iraq invaded capital of Kuwait in what turned out to be a huge blow to the stable price of oil. The oil price rose to $20.45 per barrel. The major priming for this is that both Iraq and Kuwait were members of OPEC and payable(p) to the fight there was a shortage of oil in the world oil market which led to an increase in the price of oil. Between 1990 and 1991 the States launched operation desert storm, which was to assistant Kuwait against Iraq. This also contributed to the rise in the price of oil as America is the largest consumer of oil, and they needed it during the military hunting expedition of operation desert storm. In 1991 and 1992, the price of oil decreased to $16.63 a nd $17.16 respectively. In 1993, it fell again to $14.95 and $14.74 in 1994. In 1995, the price rose to $16.10, and in 1996 it chap up to $18.52. In 1998, the price initially dropped to $12.21 but shot back up again to $17.25 in 1999. The main reason for this during this period was that there was an Asiatic economic crisis the Iraq oil-for-food programme which helped in stabilizing the price of oil in 1998. In 2000, the price of oil leaped to an astounding $26.20. The reason for this was that due to the decline in the price of oil OPEC members decided to love back production in order to stabilize the price of oil, ahead it went below the amount various member countries of OPEC will be able to cover the cost of producing oil. In 2001, the price decreased to $22.81, and in the same year (Sept. 11th) there was an attack in the US which destroyed the world trade centre. In 2002 to 2003, the price of oil rose to $23.74, and $26.78 respectively. This came about due to quick demand gr owth mainly from countries like China, and India, in which in 2004, the price of oil jumped to an ecstatic $33.64. In the present year of 2005, the periodical average of the price of oil has reached $63 a barrel. However, for reasons to do with accuracy, we have decided not to use 2005 figures since we ar still in the year. The following(a) graph represents the trend in the world price of oil over the past two decades.Data source BP statistical Review of human beings talent, June 2005.On the ply side, the main players in the rude oil market are OPEC, which currently provides about 40 percent of world supply and hold about 70 percent of proven oil reserves, and non-OPEC producers who own the rest. OPEC as the marginal supplier does act like a covenant in approximately cases, i.e. they collude to restrict the output of oil and chivvy the price far above their cost. In recent years, its policy has been to counterweight the market plot of land allowing for an steal level of crude oil inventories in consuming nations. Non-OPEC producers, on the other hand, have relatively limited reserves and spare capacity, and generally behave as price takers. Currently, the estimated reserves of OPEC are 890 billion barrels, as opposed to 177 million barrels for non-OPEC members. In the last mentioned years, world until nowts such as the Iran and Iraq war, the Asiatic economic crisis, the invasion of Kuwait by Iraq, and corpo consider social responsibility such as body politic statute which regard environmental pollution as high on the agenda (in some countrys environmental pollution is stricter than others in order to produce oil, e.g. Nigeria has a less stricter environmental pollution legislation compared to Saudi Arabia) have all contributed to the fluctuations in the world price of oil. However, of recent, the strong demand growth from Asia and China in particular can be utter to be the reason why the price of oil is rising. The intake of oil in 2004 gre w by 2.9 million barrels a day (mbd) (3.7 percent of which China contributed about 1 mbd) relative to 2003, which can be said to be the largest increase in the past 20 years. With guiding light exceptions of Iraq, Russia, and Saudi Arabia, the worlds oil producers may be scraggy to their short-run output capacity. Thereby, continuing increases in demand and the possibility of even minor disruptions (Hurricane Katrina (US), Industrial disputes (Nigeria), environmental concerns (Nigeria)) in supply thus help in explaining the high market price for oil. Investment in refine capacity has been too low, and a mismatch has emerged between the type of elaboration capacity now required and what is available. For sometime, world oil demand has been driven by high-quality light crude (oil of low density or containing a low wax content, which makes production and refining easier) and by sweet crude (oil with a low sulphur content). Recent step-ups to production capacity by OPEC have thoug h largely been in the heavy and sour grades of crude, which are more difficult and costly to refine. This lack of investment in appropriate refining capacity and limited substitution possibilities has pushed the retail price of oil up. Another reason which can be said to this lack of investment by OPEC members is a price collapse. When demand falls and the quotas allocated to member OPEC countries breaks down, the price can drop dramatically. For example, in 1997, OPEC raised its production ceiling by 2.5 million barrels per day in anticipation of growing Asian demand, but the currency crisis of late 1997 instead caused Asian demand to fall. The essence was a market price in 1998 that dipped to as low as $12.21 per barrel, the lowest level since 1973, and a $51 billion year over year reduction in oil revenue. In addition given coverd disbelief over the pace of Chinas economic development, OPEC may be cautious in expanding supply capabilities due to this. This uncertainty of slow or minimal investment contributes to high futures prices for oil delivery several years ahead. One should also note that since 1986, most oil exporting countries have been burning more oil than they have discovered and since 1998, there has been a fragile balance between supply and demand. Oil is being found at a lower rate than what has been consumed, i.e. we are finding reserves at 7 billion while consuming oil at 30 billion barrels per annum (Exxon-Mobil estimates), so the law of price adjustment and equilibrium can be said to have taken place.SUMMARY AND CONCLUSIONThis paper has looked at the description of what a market is. We have also mentioned the concepts of demand and supply with regards to equilibrium and the law of price adjustment. The erratic movement in the price of oil in the past two decades are also looked at. Issues of what factors cause fluctuations in the price of oil such as, the lack of investment by various OPEC member countries into oil production so as t o keep up with the world demand of oil, the increasing demand of oil from Asia and the Peoples Republic of China, and the uncertainty of the oil market are all mentioned.It will be worthy to conclude that although at present these factors seem to be the norm that affects the price of oil, one should be more cautious into the future, as with hindsight these factors could become disused with time passing by. Potential factors which could turn out to be introduce in the future range from alternative sources of energy to synthetic fuels, in which in the long term the demand of oil will continue to exceed supply until the previous mentioned becomes entrenched in most economies.BIBLIOGRAPHYAsian Development Outlook, (2005), The challenge of higher oil prices.BP Statistical Review of human being Energy, (2005), Putting energy in the spotlight.Berkmen, P., Ouliaris, S., and Samiei, H., (2005), The structure of the oil market and causes of high prices, research department, International Monetary Fund.Chrystal, K.A., and Lipsey, R.G., (2004), Economics, Tenth Edition, Oxford printing press.International Energy Agency, (2004), Analysis of the impact of high oil prices on the Global economy. www.iea.org/textbase/ papers/2004/high_oil_prices.pdf.International Monetary Agency, (2004), Analysis of the impact of high oil prices on the global economy, research department, December.Saxton, J., (2005), Explaining the high price of oil, Joint Economic Committee, enquiry Report, United States Congress.Serrapere, J., (2005), Crude Oil Energy and Market Outlook, September.APPENDICESSource BP Statistical review data 2005The following table since 1999 shows that there has been no material excess oil supply.Estimated Annual World Oil Demand harvesting 2000 2005 (million barrels daily) % ChangeSource IEA monthly oil report July, 2005. 1 Footnotes1 The reason we have used US dollars is that it is predominantly used internationally as the currency to benchmark trade.