Economic concepts help nations understand the trend in the changes in economy by analyzing the behaviors of economic agents. The agents of the economics are individual households and firms. This paper discusses oil crisis as explained by Udland in his article of ‘Oil falls back below $78 after OPEC cuts outlook,’ and highlights the economic trends of the product. The essay explores the demand and supply, price elasticity, equilibrium, and the nature of the market that has caused the changes in the supply of oil.
Demand and Supply
The members of The Organization of Petroleum Exporting Countries include Saudi Arabia, Venezuela, and 10 more countries. The organization has put forth that the price of the oil has increased by $70 since 2002. The increase in price has been accelerated by high demand for oil in the market, which lowered the supply of oil. By definition, oil demand is amount of oil that the end users can purchase at the prevailing cost. On the other hand, supply refers to the total output that a firm is willing and able to offer to the customers at the prevailing costs at a specific time. The law of the demand states that holding other factors constant when the price of a good increases, will not let the majority of people buy the good. Similarly, the supply law states that when price increases, more producers are willing to supply oil. OPEC report explains that the demand for oil was reducing since 2013 by 1.0 liters per day annually. The expectation is that this trend will continue up to 2019. In contrast, the demand for oil reduced by 45.2 liters per day in 2005 (Krueger 96). The high demand for oil increased the supply of oil at some period and eventually the supply reduced. For instance, the supply was increasing by 6.4 liters per day in the year 2013. The research showed that there was a peak in supply of oil in 2005. The high supply reduced the availability of oil and today, the supply has reduced by 1.6 liters. Moreover, the report assumes that the fall in supply will reach 28.2 liters per day in 2017. According to the recent news aired by British finance minister over the reduction of the oil price, demand for oil in the market will increase. However, only few countries will be able to supply oil (Krueger 99). The countries may shy away from supplying the available oil because few people will be willing to purchase the product at high price. The following graphs demonstrate changes in demand and supply. The interaction between the demands will continue until the price and quantity in demand are stable.
Demand and Supply Graphs
From the graphs A and B above, Q stands for quantity demanded at a particular time, P is price of a product at the same time, D is the demand curve, and S represents the supply arc. Markedly, the point where the two highlighted curves intersect or meet is referred to as the equilibrium point, as indicated in graph C. The price of a product at this point is the equilibrium price. Economists hold that at equilibrium price, the forces of demand and supply are in full agreement. Both suppliers and consumers are happy with the market price. Graph D shows the point of equilibrium price – $0.60. When prices increase, the demand reduces and when it is below equilibrium, many people are willing to buy it, but the supply will be low as less producers will be willing to produce. However, the price will be retained at the point of interaction between the supply and the demand curve hence equilibrium point will be reached. From the demand and supply concept, factors that may lower the demand or supply of a product include high prices, low prices of the immediate substitute, unfavorable weather conditions or climate changes among others.
Price Elasticity of Oil
According to Udland in his article ‘Oil falls back below $78 after OPEC cuts outlook, the prices of oil have been affected since 2002, because of high demand for oil in the world market. The article explains that the oil ratio to price is relatively inelastic. This is because oil faces inelasticity in supply and demand for a short run period. Therefore, as reported in this article, the change in supply and demand will be minimal. Sandler (56) reported that inelasticity has taken into consideration factors such as taxation and decline in labor market that would otherwise be risky. The prediction is that due to more innovation of energy production, the inelasticity will increase in future.
Price Elasticity Graphs
The graph above shows a large change in price, there will be insignificant change in the quantity demanded.
Market Structure of Oil
Oil industry faces oligopoly market structure. This market has few sellers in the industry. In the oil industry, few sellers dominate the market. Due to this structure, the participants are aware of the actions of each player in the market. A step or decision made by one single seller in the market affects the other sellers (Robinson and Powrie par. 11). For instance, if one firm changes the price of its products, the sales volume of other sellers in the industry changes since they sell similar products. Saudi Arabia, as the major source of oil, increased their oil prices in October 2014 that affected the oil prices of other countries like the US (Udland par. 8). For the firm to make a decision, it must consider the actions taken by other firms.
Changing Labor Market
This is a platform where employers and employees interact with each other. Here, employers compete to take the best laborers while the workers aim at getting the satisfaction in the employment sector. A report by Udland shows that labor market operates with economy faction of supply and demand of work force. In the market, the firms define demand while employees represent the supply. The major influencing factor in this market is bargaining power of the parties involved. The report explains that there is a decline in the work force in the oil industry due to rise of other sources of employment and low wages (Udland par. 7). In essence, the number of employees is directly proportional to output.
The economic analysis plays a significant role in gaining knowledge about the world economy. It is also advisable that individuals take time to keep the changes in the world market abreast. Newspapers are the best tools for the public to get this knowledge. The article by Udlands provides the facts behind oil shortages that can be explained using economic concepts. Some of the concepts used include demand and supply, labor market, market structure and elasticity in price of oil.
Krueger, Lisa. The Energy Crisis. Detroit, MI: Greenhaven, 2010. Print.
Robinson, Bruce, and Sam Powrie. Oil depletion: the crucial factor in transport planning. N.p., 2004. Web.
Sandler, Todd. Economic Concepts for the Social Sciences. Cambridge [U.K.: Cambridge UP, 2001. Print.
Udland, Myles. “Oil falls back below $78 after OPEC cuts outlook.” The Economic Times. N.p., 2014. Web.