Entries Tagged 'oil' ↓
October 20th, 2009 — oil
Readers Question: With Oil prices rising towards $100, what are the economic effects of rising oil prices?
Demand for oil is inelastic, therefore the rise in price is good news for producers because they will see an increase in their revenue. Oil importers, however, will experience increased costs of purchasing oil. Because oil is the largest traded commodity, the effects are quite significant. A rising oil price can even shift economic / political power from oil importers to oil exporters.
Current Account
Higher oil prices will lead to an improvement in the current account position of oil exporters like OPEC countries. It will lead to a deterioration in the current account position of oil importers (e.g. Germany, China). Oil exporters will see an increase in foreign currency reserves which they could use to purchase foreign assets. e.g. Arabic countries, such as Saudi Arabia are an important purchaser of US securities.
Inflation
A marked rise in oil prices will contribute to a higher inflation level. This is because transport costs will rise leading to higher prices for many goods. This will be cost push inflation which is quite different to inflation caused by rising aggregate demand / excess growth.
Monetary Policy
Cost push inflation caused by rising oil prices presents a dilemma to policy makers. Higher inflation usually requires higher interest rates to keep inflation on target. But, to reduce inflation may not be appropriate because output could be well below full employment. Arguably, in early 2008, policy makers gave too much importance to the cost push inflation and too little weight to the impending economic downturn.
Long Term Effects.
In the short term, demand for oil is inelastic. This means a rise in price only causes a small fall in demand. Demand is price inelastic because consumers need oil based products, e.g. their car only runs on petrol. However, in the long term, higher oil prices will encourage consumers to diversify consumption (e.g. buy hydrogen powered cars e.t.c.)
Also, higher oil prices will encourage firms to try and find more oil supplies, even if it is expensive, remote places like the Antarctic.
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June 25th, 2008 — oil
Readers Question: how could oil price possibly down? any supported theory?
Oil prices could fall if:
Supply Increases by more than expected.
For example, maybe a country like Iraq or Iran has an unexpectedly large reserve of oil that they could easily start producing. This increase in supply would cause prices to fall. Note: it is notoriously difficult to predict how much oil is available, and some do say that Iraq has a lot of untapped supply.
Market Sentiment Changes
Not all movements in the oil price is due to basic supply and demand, there is also a speculative element to the rising price of oil. People are buying oil futures and oil stocks because they expect prices to keep rising; this speculative demand is causing prices to rise by more than is justified by economic fundamentals. If people feel that oil price has peaked (at least for short term) speculative buyers will sell causing prices to fall.
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June 23rd, 2008 — oil
Rising Demand
Despite attempts by Saudi Arabia to increase supply, the price of oil has continued to rise. The main reason for the rising price of oil is the increased demand that we are seeing, especially in the developing world. Countries such as China and India are experiencing rapid rates of economic growth. Because their population is so large ( a combined population of over 2.5billion) this rapid expansion is causing an unprecedented rise in demand for oil.
Inelastic Demand.
With many goods higher prices lead to lower demand as people switch to alternatives. However, demand for oil is notoriously inelastic because of the lack of available substitutes. In the long term, demand may become less inelastic because substitutes develop; but, at the moment we still search for those elusive alternatives.
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May 27th, 2008 — oil
Should the Government intervene to deal with problem of Oil Shortages or is it better to leave it to a free market?
As oil runs out, supply will shift to the left and the price will increase. Because demand is inelastic, oil firms will make increased profits. This creates an incentive for oil companies to discover new oil supplies. This research is often expensive, so the higher profits is beneficial for encouraging investment. There are many oil reserves which are difficult to access, e.g. oil in the Antarctic and Siberia. Therefore, the cost of production may be $100 a barrel. Therefore, now oil prices have risen over $100, it has become profitable. Therefore, the market can respond to the changing market signals and try and increase supply. Also, firms have an incentive to develop and promote alternatives to oil, such as solar panel cars; the more expensive oil becomes the more attractive these options are.
In theory, the free markets should respond to shortages and rising prices through increasing supply or developing alternatives. However, the free market may not be able to deal with the oil shortages in a timely manner.
Firstly, demand is rising very rapidly because of economic expansion in Asia (China and India). Therefore, prices are rising rapidly, even though supply is still increasing. If we had a combination of falling supply and rising demand, prices could skyrocket. Investing in new supplies or alternatives to oil could take several years. By the time the free market has provided alternatives to oil, the world economy may have suffered several years of very high oil prices.
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May 23rd, 2008 — oil
The price of oil reached another record high yesterday – $125
- Brent Crude oil reached $126
- US light crude oil reached $128 before setting back to $127
This means that, even adjusted for inflation, oil is now close to the all time high, last reached in the 1970s.
What are the reasons behind the Recent Increase in price of oil?
- Strong Economic Growth. In particular growth from China and India have caused increased demand for oil and related products
- Shortage of Supply.
- Speculation – People have been speculating on the continued rise in price of oil. It has become an alternative to the weakening dollar.
- Political Tensions – With the lingering threat of invasion of Iran, commentators still feel that events in the middle east could disrupt future supplies and cause higher prices.
Forecasts for the Future
Speculation or Shortage?
Some members of OPEC dispute that there is a fundamental shortage of oil. They argue that there is plentiful supply of crude oil. Therefore they argue that the recent price rises are not based on economic fundamentals, but a speculative bubble. If this is the case, oil prices could easily fall next year when market sentiment changes.
Global Growth. Some feel that the US economy is heading towards recession, because of the weakness in the housing market. However, US growth is still remarkably resilient and Global growth is being bolstered by the strong performances from the Chinese and Indian economy. With no imminent slowdown in economic growth from China, demand for oil is likely to keep rising.
The Dollar. If the dollar continues to remain weak, this will strengthen oil prices. Yesterday, the Fed said interest rates are unlikely to fall in the near future; this may help stabilise the dollar. See predictions for US dollar 2008
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April 15th, 2008 — oil
Readers Question: when will oil run out?
It is difficult to say.
Firstly on the demand side, demand for oil is rising faster than many expected. This is largely being driven by rising growth in developing economies such as India and China. Today we consume an average of 85 million barrels daily. According to the most conservative estimates from the International Energy Agency that figure will rise to 113 million barrels by 2030.
On the supply side the known reserves of oil varies between 1 trillion barrels and 3 trillion.
Unknown Reserves
The amount of oil reserves is uncertain. For example, there could be a lot in the Antarctic. At the moment, this continent is relatively unknown. However, as oil prices rise, it will become difficult for countries to resist the the temptation to increase supply in these fragile areas.
Steady Decline of Oil.
Most oil analysts argue that the production of oil tends to follow a bell curve distribution. Reaching a peak before slowly declining and tailing off towards the end. Continue reading →
March 24th, 2008 — oil
It is pretty difficult to predict the future price of oil. There are many factors at work and it is hard to isolate any particular economic fundamentals that will determine the future price. Nevertheless in response to a readers question I posted a few factors which might keep oil prices above $100 for the next 12 months.
Oil price predictions
March 18th, 2008 — oil
Readers Question: The Oil Petroleum and Exporting Countries(OPEC) comprise the main oil procedures in the world. With the aid of diagrams show how OPEC is able to fix the price of oil on the world markets and comment on its recent activity in this area. Suggest what would happen if OPEC kept increasing prices rapidly over time.
OPEC comprise over 50% of the world’s oil suppliers. Therefore, if they restrict supply of oil it will have a significant impact on increasing price. (Diagram will be a simple supply and demand, with supply shifting to the left. Don’t forget demand for oil is quite inelastic, so a fall in supply has a big effect on price. Note this diagram shows an elastic demand, but for oil it should be steeper and more inelastic
Graph of Fall in Supply of Oil
Therefore, if prices are falling below their target they will try to set quotes and restrict supply.
Recent OPEC activity.
- I believe the recent rise in the price of oil is not really due to OPEC it is due to:
- Increased Demand (especially from China) Continue reading →
March 5th, 2008 — oil
Readers Question – When a war brakes out in middle east,the price of petrol rises, and the price 0f a used ford falcon falls why?
When a war breaks out in the middle east, there is likely to be disruption to the supply of oil. 50% of our oil comes from the middle east, so if the countries are engaged in war then output is likely to fall and supply shift to the left causing price to rise.
Even if output doesn’t fall, people may push the price of oil higher because they think that it might do. There is also a fear that middle eastern countries may restrict the supply of oil just to annoy Western countries like the US. This happened in the 1970s.
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February 1st, 2008 — oil
But, do they deserve it?
Last year, Shell made profits of $27.6bn (£14bn). This equates to profits of about £1.5 million per hour – which by any stretch of the imagination is not a bad hourly earning.
The profits have been criticised by trades unions, environmentalists and motoring organisations.
Motoring organisations claim that petrol is too expensive and it is unfair companies make such profit at the expense of the motorist. Personally, I think petrol should be expensive (for environmental reasons). But, also, Shell make the majority of their profits in the production of upstream oil, not at the petrol pump. The profit margin on the retail price of petrol is quite low; most of the cost of petrol is tax to the government.
Environmentalists argue it is wrong to make the profit from a process which is contributing to environmental problems. It is argued a windfall tax should be levied on the profits of Shell; this money could be used to combat the effects of global warming.
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