The Supply and Demand of Oil Essay
The Supply and Demand of Oil
Most people, especially the anti-American regime, blame George Bush as the main reason why oil prices in the international market has been increasing in the recent years. According to them, George Bush serves as an avenue for Iraq and its allies in the Middle East to cut their supply of oil in the world market as a “payback” for attacking Iraq.
Back in the early 2000’s, George Bush commence a war against Iraq for the reasons that he want to end terrorist groups that houses in the said country as well as to spread democracy in the middle east. Iraq, one of the top oil producers in the world market, in response to the action of the United States, Iraq, together with other Islamic countries, cut their oil supply in the world market for United States to suffer from rising oil prices since it is the main consumer of oil in the world market.
Little this people know, George Bush is not liable for the rising of oil prices in the international market. Iraq as well as other oil producing countries around the globe is a member of OPEC – an organization of oil producing countries operating as a cartel. Cartel, just like OPEC, manipulates the supply of a certain good in order to influence the market price in the market for the benefit of its members and/or depends on the capacity of oil that its member countries can provide to the world market.
The said cutting of oil supply of Iraq and other Islamic countries was just a move initiated largely by OPEC and was not because of the war commenced by George Bush. Even if the said attack in Iraq of the United States influenced the decision of Iraqi government and other Islamic countries to cut their oil supply in the world market, but its level of significance was not enough in order to say that George Bush was liable for the rising of oil prices in the market.
Another fallacy that most people believed to be one of the factors that triggered the rising of oil prices in the market would be the price gouging of domestic oil firms in the market that unreasonably increases the prices of gasoline in the market. People that believes in this factor claims that domestic oil firms only wants to further increase their profitability and only uses the condition of world market for oil as a leeway in order to justify its indiscriminate and unjustifiable price increase on gasoline and other petroleum products in the domestic market. Moreover, say that price of oil in the world market indeed increase due to shortage of oil, domestic oil firms charges more than the amount that they should charge to their customers just to maintain their profitability.
In other words, ignorant people about the real score on the rising of oil prices accuse domestic oil firms from cheating on them. Even if it is possible, the government would not allow such even to happen. There is a more logical reason why oil prices and other petroleum products are increasing robustly in the market in the recent years.
In some countries, like for the case of the Philippines, they have the Department of Energy that monitors and approves the price increase of their domestic oil firms. In short, domestic oil firms cannot just unreasonably raise their prices since the government keeps eye on them. Moreover, the value judgment of people claiming this factor as one of the factors that triggers the rising of oil prices in the market is based on emotions and on what they see on their immediate environment.
Just like the case of the first fallacy discussed above, these types of people hastily makes conclusion without conducting thoroughly research and study. At the end of the day, the association of price gouging and oil price hike is not but a fallacy, a fallacy of hasty conclusion.
Price Fixing of OPEC
Few decades after the establishment of OPEC, it mainly has the power to influence and manipulate prices of oil in the international market by either raising or cutting the volume of oil that they supply in the international market. But in the recent years, due to the depleting oil reserves of many oil producing countries, especially oil producing countries in the Middle East, OPEC has been increasing the prices of their oil in the market robustly in the recent years not because they want to but because they are forced to.
But many people still are skeptical on the real score on the rising of OPEC’s oil in the international market. Those statements of many people claiming that OPEC manipulates the prices of oil in the world market are making a foregone conclusion (Peopledaily.com.cn 2004). Before this claim seems to fit, but now, amidst to the problem on depleting oil reserves of many oil producing countries, this claim does not hold anymore.
At the end of the day, people, especially consumers that are not well-informed about the current situation of oil reserves of various oil producing countries in the world market, are insisting that OPEC, as a cartel, takes advantage of its market power and indiscriminately charges higher prices that what is should be optimally charging to its customers. Again, these claims of above mentioned people are nothing but a mere fallacy for they do not have the strong argumentation about the true roots of oil price increase in the international market.
The Real Issue – Supply and Demand
The main and acceptable reason behind the pricing of oil prices in the world market would be the level of supply and demand in the market. These economic factors are the determinants of “right” and “justifiable” market price of oil in the market. There are no other factors that can influence the price of oil justifiably other than the demand-supply relationship since these factors are market driven and being controlled by all of the sectors in the economy. Demand, as a one of the economic factors that influences the spiking of oil prices in the market, accounts to all of the industries’ degree of importance of oil in the market.
It also accounts all of the political and social factors of the market and incorporates these factors to the consumption behavior of the consumers in the market. In other words, demand is a good determinant of “true” value of market prices of goods and services in the economy. It is the market forces that influence the level of demand of goods and services in the market, and this market forces always provides benefits to the society as a whole. At the end of the day, demand reflects degree of importance of oil in various sectors as well as accounts all the social and political factors that affect such degree of importance of oil.
On the other hand, the supply is also another important economic factor that greatly influences the price increase of oil in the international market. Supply provides the willingness to accept of producers in the market. Like for the case of oil industry, the oil prices that is triggered by supply factor is mainly reflects how much price the oil producing countries are willing to accept in order for them to produce oil in the market.
In other words, supply reveals the prices that oil producing countries are willing to receive in order for them to continue their production of oil in the market. Given that oil reserves of oil of most oil producing countries are starting to deplete creating an avenue for them to supply oil less in the international market, it creates enough market pressure for oil prices in the world market to increase robustly.
Since the oil reserves of oil producing countries are depleting, the willingness to accept of oil producing countries increases as a move to protect their profitability (Schoen, 2004). But increasing their willingness to accept would give them enough room to raise their profit since they can haggle for higher prices of oil in the market to the consumers. This scenario is the one that is happening at present times – oil producing countries and OPEC are forced to raise their prices, or willingness to accept, due to their depleting oil reserves and not primarily because of the high demand in the market, while consumers shoulders all of the burden (Newscientist.com 2007).
The Supply and Demand of Oil
In the recent years, the prices of oil in the international market has been increasing due to the depletion of oil reserves of many oil producing countries and member countries of OPEC. This issue has already been discussed in the previous part of this paper. It was identified that the price of oil in the world market already breaks its previous records. The price of oil in the world market per barrel as one the previous month is averaging to $140/barrel which only suggest how severe the shortage of oil in the world market is.
Given a high demand for oil in the market, assuming a constant supply of oil in the market, prices would surely increase significantly since the willingness to accept and willingness to pay of producers and consumers respectively will increase. Since oil is one of the major commodity of most industries nowadays, the demand for oil is overwhelming for most oil exporting countries, and so with OPEC (Muhanna, 2004).
But this overwhelming feeling of OPEC and other oil exporting countries won’t last long considering that they do not have enough oil reserves to supply the large demand of consumers in the market. As a result, in order to maintain their present profitability, OPEC and other oil exporting countries are forced to raise the prices of their oil in the market, regardless of the level of demand of consumers for oil. In this regard, if is therefore clear that demand and supply relationship of oil is the one that currently influences the spiking of oil prices in the world market.
In this regard, it is therefore clear that demand and supply of oil in the world market is the main factor why oil price has been spiking in the recent years and not because of the above mentioned fallacies about the rising of oil prices raised by “emotional” based judgment of consumers and ignorant people.
Muhanna, I. (2004). Oil Price Hike. Retrieved July 26, 2008, from http://www.arabnews.com/?page=6§ion=0&article=51086&d=6&m=9&y=2004
Newscientist.com (2007). Depleting Oil Supplies Threaten “Meltdown in Society”. Retrieved July 26, 2008, from http://environment.newscientist.com/channel/earth/energy-fuels/mg19626273.900-depleting-oil-supplies-threaten-meltdown-in-society.html
Peopledaily.com.cn (2004). Ten Specious Fallacies on Current World’s High Oil Prices. Retrieved 26, 2008, from http://english.peopledaily.com.cn/200409/07/eng20040907_156168.html
Schoen, J. W. (2004). How Long will the Word’s Oil Last? Retrieved July 26, 2008, from http://www.msnbc.msn.com/id/5945678/