In 2004, the world production of oil was estimated at just over 29. 7 Bbl. The corresponding world consumption for oil during the same period was estimated at 29. 6 Bbl of oil, leaving a surplus of just under 0. 1 Bbl at the end of the year. In the United States, one of largest consumer markets for oil and oil products, from the first week in September 2004 to the first week in September 2005, gasoline prices increased by a staggering $1. 22 per gallon to $3. 12 before dropping to $2. 25 on November 21, 2005. These figures are quite staggering considering that contracts for crude changed hands at 10 USD/barrel in 1999.
With the emergence of China in the global market and its increasing demand for oil, it is projected that unless oil companies are able to increase the world production by investing investment in oil and natural-gas production oil prices could increase exponentially over the next ten (10) years. The obvious factor in determining the supply of oil in the world is the amount of oil that can actually be extracted and processed. Oil is essentially a non-renewable energy source and cannot be replenished once it has been extracted from the ground. The role of oil companies and countries is not in the actual production of oil but in it rationing.
A network of scientists called the Association for the Study of Peak Oil and Gas (ASPO) which is affiliated with a wide array of global institutions and universities studies the depletion rate of oil. ASPO studies concern themselves in determining the date and impact of the peak and decline of the world’s production of oil and gas, due to resource constraints. The ASPO uses the “Peak Oil Theory” or the “Hubbert Peak Theory” which is a method of modeling known oil reserves and production rates and routinely used by oil companies to predict future yields of existing oil fields (Legget, 2005).
Using this model, it has been projected that the world oil production growth trends, in the short term, have been decreasing over the last 18 months. Average yearly gains in world oil production from 1987 to 2005 were 1. 2 million barrels per day (mbbl/d) (1. 7%). Global production averaged 84. 4 mbbl/d in 2005, up only 0. 2 mbbl/d (0. 2%), from 84. 2 mbbl/d (13. 4 million m? /d) in Q4 2004 (Legget, 2005). ASPO predicts that conventional plus unconventional oil production will peak around 2007
What this data basically means is that the current supplies of oil all over the world are being depleted and newer sources have not yet been discovered. To bring the supply of oil up again, oil companies must invest more in locating more oil fields and also develop new technologies to improve the current refining processes to allow for a more efficient production of oil. This first factor in the supply of oil is basically dependent on the actual amount of oil that can be produced and processed and also considers the capacity of oil companies to refine oil more efficiently and to tap other sources of oil (Deffeyes, 2005).
This factor however also heavily depends on the capital investments that oil companies make in the oil industry. One of the main factors which affect the demand for oil is the price of oil. But given the fact that oil is a necessary resource and that it is a non-renewable energy sources, the supply can basically only remain at a certain “Peak” level depending on the amount which can actually be processed and the demand also remains at a certain level even if oil prices continue to rise (Case, 1999).
Ordinarily, if the resources were renewable, there would be perfect elasticity between the supply and the demand in proportion to the increase or change in the price. Therefore, if the price of oil were to increase, it would theoretically result in the demand for oil to decrease (Case, 1999). This assumption however cannot be applied to the case of oil because, as mentioned earlier, oil is a non-renewable resources and remains as the primary source of energy in the world today. This shows the inelastic demand for oil.
The reason for this is that since oil remains the main energy source in most countries, the demand for oil will remain constant despite the changes in the price of oil (Case, 1999). While theoretically it is expected that there will be a greater demand for oil if the price decreases, it is important to factor in the fact that more governments around the world are implementing energy saving policies as well as trying to reduce to dependence on oil as an energy source by developing alternative sources of energy (hybrid cars, solar power, hydroelectric power) (Simmons, 2005).
The fact that oil is a non-renewable resource must also be considered. The next factor which affects demand for oil is the availability of alternative energy sources which are cheaper (Bilgen, 2004). The presence of substitutes in a market allows the demand for oil to decrease if the price continues to increase (Case, 1999). Before discussing this factor, it is important to remember that the development of alternative energy sources is not in proportion to the increasing rate of demand for oil.
The presence of substitutes in a market affects demand because any increase in the price of the commodity means that the consumers have an alternative and can lower their demand for the commodity and purchase the substitute instead (Case, 1999). The same principle applies for oil except that it must be remembered that the development of these substitutes or alternative sources of energy takes a considerably longer amount of time than conventional substitutes.
However, under the assumption that there are already alternative sources of energy available in the market, it can be expected that the demand will react accordingly to any increase in the price of oil. The dependence on oil as an energy source will decrease thus reducing the demand for oil in proportion to the price increases (Pimentel, 1998). The challenge remains however for countries and governments to find ways to find alternative energy sources to reduce the world dependence on oil as an energy source and ease the burden that the increasing prices have on the consumer.
While the government may effectively regulate its use, the best solution is still in the development of energy substitutes for the market (Pimentel, 1998). Other factors which also have an effect on the demand for oil are things such as the government regulations on the use of fossil fuels, energy saving campaigns and environmental regulations. The government can implement these measures by increasing taxes or imposing fines. The effect that this has on demand is simple. The government regulations effectively reduce demand because the consumers are restricted from buying more oil.
By encouraging the implementation of energy saving policies, oil consumption is also greatly decreased thus affecting the demand. The demand for oil therefore is affected by many factors such as price, availability of substitutes, and government intervention in the form of taxes, energy regulations and price controls. References: Bahree, B. (2006) Investment by Oil Industry Stalls November 8, 2006 Wall Street Journal November 2006 Bilgen, S. and Kaygusuz, K. (2004) Renewable Energy for a Clean and Sustainable Future, Energy Sources 26, 1119 Case, K. and Fair, R.
(1999). Principles of Economics (5th ed. ). Prentice-Hall Deffeyes, K. (2005). Beyond Oil: The View from Hubbert’s Peak. Hill and Wang publishing House. Hill and Wang United States Leggett, J. (2005). The Empty Tank: Oil, Gas, Hot Air, and the Coming Financial Catastrophe. Random House. Pimentel, D. (1998). “Energy and Dollar Costs of Ethanol Production with Corn” Hubbert Center Newsletter, 98/2. M. King Hubbert Center for Petroleum Supply Studies, p. 8. Simmons, M. (2005). Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Random House