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Frenzy In The Markets As Oil Heads For $100 A Barrel

675 words - 3 pages

The article is about the record high prices of oil and the reasons behind the price mechanism on the world market from oil. Two main reasons are pointed out in the article, namely increased demand for oil and reduction in the supply.Demand is the total amount of goods and services that consumers want and are willing to buy at any price over a period of time. There are several factors that can influence demand: price, availability and price of substitutes, expectations of consumers of future price, etc. In this article it is made clear that consumers are driven to buy more oil at the lower prices- “coming in to buy into dips”. Their expectations are that the price of oil will rise even further and they want to have enough stock e.g. factories, dealers before price rises. The expectation of dealers on their US market that the weekly figures for the oil ...view middle of the document...

Supply is ……This sense of future reduced supply comes from the Us Energy Information Administration revising “ its projection for US crude stocks” at lower levels, while projecting a demand for oil for the fourth quarter that will increase with 40 000 barrels per day. This increased demand will cause a shortage in the US market for oil ( graph and explanation).As oil is a relatively inelastic good, increases in its price will reduce the quantity demanded less than proportionately. Price elasticity of demand is the responsiveness of quantity demanded of a good to changes in its price. ( graph should show the relatively inelastic demand for oil).If the increased price of oil stays on the market for a long time, it will affect the whole society. Prices of other goods and services will also increase due to the fact that oil is a resource necessary for the production of every good and service in the form of energy. There are very few substitutes for oil and the cost to switch production to these substitutes is high. Consumers will have to pay higher prices for the same amount of goods and services as before which means that they will be able to buy less amount than before. Oil producers’ revenues will increase because of the relative price inelastic demand for oil. As less amount of oil will be bought, the government tax revenue from the indirect tax on oil will………decrease/ increase- (graph), and a bigger incidence of tax will be born by…………A solution of the problem with higher oil prices on the US market could be for the US government to use part of its oil reserves to increase the supply as well as reassurance by the US …administration that the oil in stock is enough to satisfy the increased demand although the projections for it are higher. In this way the consumers will be able to feel confidence about the future prices of oil.http://www.guardian.co.uk/business/2007/nov/07/oilandpetrol.news

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