Readers Question – When a war brakes out in the 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 a war then output is likely to fall and supply shift to the left causing the price to rise.
Even if the output doesn’t fall, people may push the price of oil higher because they think that it might do. Speculators play an important role in determining oil prices in the short-term,
There is also a fear that middle eastern countries may restrict the supply of oil as an economic sanction against western countries like the US. This happened in the 1970s. When OPEC restricted supply of oil, pushing up prices to three times their previous level.
If oil and petrol are more expensive, then people will look for alternative forms of transport. For example, rather than buy a car people may continue to buy bus tickets and cycle to work. If the price of oil is cheaper then people will want to buy second-hand cars like a Ford Falcon. Therefore, there will be less demand for ford falcons and the price will fall.
How significant is war on the price of oil?
- In the 1991 Gulf war, there was a sharp rise in the price before falling to pre-war level on the conclusion of the war.
- In the 2003 invasion of Iraq, there was only a modest rise in the price of oil.
- There was a more significant long-term rise in price from 1999 to 2008. This was due to strong global growth and fears that demand for oil was growing faster than supply.
- The credit crunch in 2008, led to a dramatic fall in the price of oil. In a recession, demand for oil falls significantly, causing the drop in price. When the economy recovered, oil prices also go back up.
- This graph shows that the state of the global economy can have a bigger influence on oil prices than medium-scale war.
Since the 1970s, the supply of oil has become more diversified. Oil supplies do not rely on Middle-east countries like in the past. There is oil supplies coming from Russia, Latin America, US and parts of Europe.