Basic economic issues

Subject: Economics
Pages: 6
Word count: 1593
Save this page for later by
adding it to your bookmarks
Press Ctrl+D (Windows)
or Cmd+D (Mac OS)
Text
Sources

Introduction

In every country, there is demand and supply of items and various factors which influence demand and supply. In all the economies, the law of demand and the law of supply are the key determinants of the welfare of the economy (Baumol & Blinder, 2015). The laws describe that when the supply of a product increases, then the price of the product decreases and when the supply of a product decreases, then the price increases. Price and supply have an inverse relationship. When the demand for a commodity increases, then the price is expected to increase and when the demand for the product decreases then the price of the commodity will decreases. Demand for a product and price have a direct relationship.

Demand and supply change depending on the state of an economy; that is, whether the economy is in a recession or a boom. In this case, the economic study is on oil. In this paper, factors within and outside the US affecting the supply and demand of oil will be highlighted and a forecast of the oil price on November 21st will be made.

Supply of Oil

The supply of oil in the US is very high because oil is the main source of energy. There are factors within and outside the US that influence the supply of oil. The supply of the oil determines the price levels of oil. The factors affecting oil supply in the US include the price of oil in the US, the technology in the country, the environmental conditions, political events of other countries, the production cost and the availability of oil reserves.

Factors within the US affecting the supply of oil

The price of oil in the US: The prevailing prices largely affect supply. When the prices of oil are high, the supply of the oil also increases. The supply increases because more drilling projects are invented to increase the supply (Miller & Sorrell, 2014). More research is also done to increase the supply. But when the prices of oil decrease, then its supply also decreases. This is especially because the individuals and companies supplying oil in the US fear incurring losses. Additionally, they are not be motivated to supply the oil due to the low prices.

The technology in the US: People have come up with new and better methods of drilling oils from the reserves. These methods have increased the supply of oil (Miller & Sorrell, 2014). The methods are better and advanced when compared to the old ways of drilling oil thus increasing oil supply in the US.

The environment in the US: Environmental changes in the US also affect the supply of oil in the country. Catastrophes such as earthquakes and hurricanes can disrupt the drilling of oil (Arezki et al., 2014). When catastrophes hit the nation, the supply of oil reduces because the flow of the crude oil is blocked beginning from the disruption of drilling. The economic activities of the country also get disrupted.

The availability of oil reserves: The amount of oil available in a nation depends on the number of reserves. It is the duty of engineers to regulate the amount of oil that is to be obtained from the reserves without causing any depletion. When the number of reserves is many and they can produce a lot of oil, then the supply of oil is expected to be high (Juvenal & Petrella, 2015). When the number of reserves is less and little oil is produced, then the engineers will regulate the amount of oil being harvested thus decreasing the supply of oil.

Factors outside the US affecting the supply of oil

Political events of other countries: In the case of supply of oil to other countries, the US has to consider the political stability of the countries. Political instability tampers with supply, hence during such periods, the US supplies less oil to nations experiencing it (Griffin & Teece, 2016). A good example is South Sudan, a country in Africa which has been experiencing a lot of civil wars. Due to such wars, the US will be discouraged to supply oil in that country.  The supply of oil will therefore reduce.

The production costs: When a country incurs very many expenses in oil production, then it has to increase the prices to cover these costs, which in turn leads to less supply (Fisher, 2015). When the cost incurred to produce oil is less, then oil prices decrease hence increasing the oil supply.

Demand for Oil

Oil is considered as the largest source of energy. With the increasing population in the US, the demand for oil is expected to increase further in future. The demand for oil in the US is affected by many factors within and outside the country. The factors can result to a positive or negative effect. Such factors include the oil prices in the US, availability of substitutes, the consumption rate of the country, the price of other fuels, the price of oil in the supplying country, foreign exchange, and advancements in technology.

Factors within the US affecting the demand for oil

The prices of oil in the US: When the prices of oil in the country increase, its demand will decrease (Baumeister & Peersman, 2013).  For example, customers who use vehicles which use a lot of oil will abandon the vehicles and use fuel saving vehicles. Others will avoid driving or drive less to avoid the high cost of fueling the vehicles. When the prices of oil in the country decrease, its demand increases. When this happens, more customers will purchase the oil due to its low price. High oil prices tend to drag an economy to a recession. The recession results to low demand hence the oil prices decrease.

Availability of substitutes: Some energy providing products may be available at a lower price than oil. The customers will thus prefer the substitutes to oil because of the price, especially when the price of the substitute is lower (Griffin & Teece, 2016).  This factor decreases the demand for oil because customers shift from using it to using the substitutes. Even though the alternatives are not many, they usually affect the demand of oil.

The consumption rate of the US: The US is a highly developed country. The rate of oil consumption is high due to the increased development. The demand for oil is thus expected to be high when compared to other countries (Kaygusuz, 2012).

The prices of other fuels: When the prices of other fuels, which can be used for the same purpose as oil are high, the demand for oil will be high because consumers will be discouraged from buying other fuels. When the prices of other fuels are low, the demand for oil will decrease as consumers will prefer the other fuels.

Factors outside the US affecting the demand for oil

The prices of oil in the supplying countries: The US does not produce all its oil. It has to import oil from other countries. The price of oil in the supplying country will determine the demand for oil in the US. When the prices are low, the demand for oil in the US will be high. When the prices are high, the demand for oil in the US will be low (Tverberg, 2012).

Foreign exchange: In the global market, oil is traded using the US dollar. When the value of the dollar increases, many consumers will be discouraged hence the demand for oil will decrease (Basher et al., 2012).  When the value of the dollar depreciates, many consumers will take this as an incentive thus the demand for oil will increase.

Advancements in technology: This has led to the need for more oil, especially in developed countries. When there is a petite advancement in technology, the demand for oil will also be subtle (Benes et al., 2015). This shows that demand for oil increases with advancements in technology.

Price Prediction

As mentioned earlier a result of population increase in the US, the supply and demand for oil are forecasted to grow. When evaluating the prices of oil, there has been a prediction that next year, a single barrel of oil will cost approximately $56. Others have forecasted that in the following year, the oil prices will increase beyond $60 for every barrel (Closson, 2013). The trade of oil in the coming year is expected to range between $50 and $60 per barrel. On November 21st, the oil price prediction is supposed to range between $47.31 and $57.82 per barrel of oil (Anandan & Ramaswamy, 2016). The price is projected to increase by the end of the year.

Conclusion

Oil has proved to be the largest source of energy that is used globally. Even though there are alternative sources of energy, oil will always remain as the most common source of energy. Every economy is characterized by demand and supply. The laws of demand and supply determine the stability of an economy.

We should all aim at controlling the factors that affect demand and supply. Emphasizing on the positive factors would improve the conditions of our economy so as to avoid recessionary gap and inflation. Factors that influence the supply and demand for oil in the US can either be within the country or outside the country. Some of the factors affect both supply and demand, but in different ways. Depending on the factors influencing the demand and supply of oil, we can forecast the prices of oil at any time of the year.

Did you like this sample?
  1. Anandan, M. & Ramaswamy, S. (2016). Global Oil Market: Macro Economic Scenario. Global Journal for Research Analysis, 4(9).
  2. Arezki, R., Loungani, P., van der Ploeg, R. & Venables, A. J. (2014). Understanding international commodity price fluctuations. Journal of International Money and Finance, 42, 1-8.
  3. Basher, S. A., Haug, A. A. & Sadorsky, P. (2012). Oil prices, exchange rates and emerging stock markets. Energy Economics, 34(1), 227-240.
  4. Baumeister, C. & Peersman, G. (2013). Time-varying effects of oil supply shocks on the US economy. American Economic Journal: Macroeconomics, 5(4), 1-28.
  5. Baumol, W. J. & Blinder, A. S. (2015). Microeconomics: Principles and policy. Boston: Cengage Learning.
  6. Benes, J., Chauvet, M., Kamenik, O., Kumhof, M., Laxton, D., Mursula, S. & Selody, J. (2015). The future of oil: Geology versus technology. International Journal of Forecasting, 31(1), 207-221.
  7. Closson, S. (2013). The military and energy: Moving the United States beyond oil. Energy Policy, 61, 306-316.
  8. Fisher, F. M. (2015). Supply and Costs in the US Petroleum Industry (Routledge Revivals): Two Econometric Studies. New York: Routledge.
  9. Griffin, J. M. & Teece, D. J. (2016). OPEC behavior and world oil prices. New York: Routledge.
  10. Juvenal, L. & Petrella, I. (2015). Speculation in the oil market. Journal of Applied Econometrics, 30(4), 621-649.
  11. Kaygusuz, K. (2012). Energy for sustainable development: A case of developing countries. Renewable and Sustainable Energy Reviews, 16(2), 1116-1126.
  12. Miller, R. G. & Sorrell, S. R. (2014). The future of oil supply. Philosophical Transactions of the Royal Society of London A: Mathematical, Physical and Engineering Sciences, 372(2006), 20130179.
  13. Tverberg, G. E. (2012). Oil supply limits and the continuing financial crisis. Energy, 37(1), 27-34.
Find more samples:
Related topics
More samples
Related Essays