Question:
Identify the main real world demand and supply factors that influence the price of oil, including macroeconomic factors,Use demand and supply diagrams to show examples of how these real world demand and supply factors affect the price of oil.Using real world examples, show how changes in the price of oil affect pricing and costs in road/rail/air transport.
Answer:
ENERGY INDUSTRY:
HOW THE DEMAND AND SUPPLY FACTORS INFLUENCE THE PRICE OF OIL The world has being relying on oil to be the primary source of energy to guide its development and progress for more than a century now. However it has been observed that oil is an elastic commodity due to the high fluctuation in prices from time to time. The supply and demand changes for oil even for short time periods have had huge influences on the global oil prices. Hence it is important to have knowledge of the supply and demand factors which cause the price of oil to change and thus exercise the power to influence the rate of progress and development of different nations of the world.Generally it is understood that the prices of a commodity become high is the demand is high and the supply is lesser to it in comparison. Thus the price will be low if the demand is low and the supply of the commodity is high. However, in the case of oil prices this is influenced by the oil futures market where the price of oil for a later date is predetermined after speculating on the trend of demand and supply of oil at a later date. Hedgers involve themselves in the oil futures market after speculating on the demand and supply of oil in the days to come. Organizations like the OPEC have been formulated with the aim to ensure a stable oil market by balancing the supply and demand of oil. A major supply factor which influences the price of oil is the production capacity of the oil producing countries. Very often the country maintains abalance with the demand such that the demand always stays high to ensure a fair return to the oil producing company for their investment. However since crude oil is rarely used for productive purposes the refineries are mostly made to work below their full potential so that the reserves of oil in the country are not sold out at lower prices. For example the surge of shale gas production in America by the end of 2014 led to a fall in oil prices in the country due to the increased supply
If the resultant fall in prices makes the investment unprofitable then it can negatively impact the industry because of which measures are adopted to bring about a balance in the market
The volume of net imports by the countries can also be a major supply factor. It is believed that China will be the biggest importer of oil by 2020 because of which the future price of oil is dependent to a large extent on the prosperity of the Chinese economy which should enable it to import more oil
The countries with high oil reserves also have a large role in determining oil prices since they will be relied on for the major supply of oil in the future. Saudi Arabia, the country with the largest oil reserves at 267 billion barrels is followed by Venezuela at 211 billion barrels. Many of these countries are members of OPEC which influence oil prices.The geopolitical factors have a major role to play in determining the supply of oil since many of the oil
producing countries face geo political issues. An example of this would be the Iran Iraq war, the political upheaval of Libya and Iran in the recent past.The emergence of ISIS in the Middle East has further contributed to the supply issue.The demand for oil is mainly dependent on the economic status of a country which in turn affects its capability to afford oil imports or its capability to sustain a high demand for the fuel. For example it is understood that in countries like USA the demand will be very high to support its road and air transport.But in those countries where oil is subsidized to make them affordable for the general public may not be able to do it for long which will in turn reduce the demand for oil. Another major factor is weather related problems which can cause a sudden increase or decrease for oil.An example of this can be how the hurricanes of 2005 resulted in the reduction of supply of petroleum and petroleum products. This is also true of the demand side where low temperatures will increase the demand for oil which will be needed to heat the buildings.Low temperatures can also cause problems for the efficiency of the oil pipelines further restricting the supply. Extreme high temperature can also incr ease the demand for oil which will be used to provide power to the cooling systems. Such short term issues can lead to increase in global price of oil for the short term