In the case of products with a normal elasticity, when the price increases, the demand for the product goes down matched with an increased supply. With the increase in supply, the prices come down and the market equilibrium is reached (King). This is in the case of goods with normal demand elasticity. For oil, the demand is relatively inelastic and the demand does not come down so rapidly as in the case of other commodities. Contrastingly, the price increase leads to sourcing from cheaper sources of supply in the long run or the development of alternative fuels like ethanol. However, presently the supplies are just sufficient to meet the weak demand existing due to the economic slowdown. These sources of supply would face a decline at a fast pace. In addition, the current prices of oil are not sufficient to encourage any long-term investments for ensuring future supplies, conservation, and consumption efficiency which are the necessary factors to face the problem of decline in the supply source. Economists are of the view that because of the time lag between a sufficient price and oil reaching the market to meet the current demand and because of the impact of the current weak price on the producer confidence, there would be a continued increase in the volatility of the prices. The market’s price signal must make increasingly exaggerated moves to bring supply and demand positions to an equilibrium level (Jeffvail, 2009).
Thus, most economists are of the view that the steel mismatch between demand and supply has been one of the potential causes for the continued and steep rise in oil prices for the past few years. They explain that the oil prices increase either because there has been a steep rise in the global oil demand or there has been control over the oil supply, which affected the quantum of oil supplied to the market. The rapid growth of the economies of China and India and many other emerging economies in the globalization era has been attributed as one of the predominant reasons for the continued rise in the prices of oil. However, with the economic recession and the reduction in the oil prices, the economists are attributing different reasons for the volatility in the prices, and for reasons enumerated above, the economists think that the oil prices would continue to be volatile until the market’s price signal gives an encouraging trend.
The rationale behind the Economists’ Views
The economists have reached these conclusions based on the theory of operation of the laws of demand-supply. They would most probably have relied on the economic concept that the global supply of oil from OPEC is unable to meet the increased demand for oil. According to economists, the oil demand has been increasing because of the increased demand for oil from emerging as well as developing economies.
In my opinion, the views of the economists are not consistent and convincing. For instance, the oil prices shot up to nearly $150 a barrel and the prices dropped to record low levels within a short time. This makes the arguments of the economists baseless and devoid of any logical backing. It is possible for people without expert knowledge in economics to understand the fluctuations in the oil prices were mainly because of the excessive trading in the oil futures without any physical supply of oil. The speculation resorted to people to make short-term gains by trading in oil futures was the main reason to make the oil prices soar to higher levels. With the tumbling of the capital markets coupled with liquidity pressures, the traders in the oil futures have to exit the market and this has made the prices of oil fall to record low levels. Apart from this, there is no phenomenon of economic theories of demand and supply operating on the prices of oil.
- Jeffvail. (2009). Mechnics of Future Oil Price Volatility (A Flubber Cobweb). Web.
- King, W. (n.d.). Equilibrium of Supply and Demand.