Supply and Demand Issues How Do Changes

Supply and Demand Issues

How do changes in supply and demand effect oil prices? In general, prices of crude oil behave in a similar way to most other commodities that have global demand. There are wide price swings during shortages (artificial or real) or oversupply; large swings in the graphs that show price relationships and dramatic and rather unpredictable pricing seemingly out of control from the consumer. Demand, in particularly is a major factor on supply -- with China and India vying for more and more crude oil because of their growing economies, their demand continues to skew the curve. Similarly, many oil rich nations have exhibited supply issues because of war (Iraq) or political problems (Venezuela). Thus, more demand, lower supply means higher prices.

Part 2 -- Which two countries are the largest consumers of petroleum products? The United States (#1) and China (#2).

Part 3 -- Explain what happens to price and quantity of oil when the following occur:

The Price of SUVs falls -- SUV's are notoriously poor with gas mileage, and expensive. If the price of the SUV falls, dramatically, though, consumers will see a savings and then be more apt to purchase, knowing gas mileage is not great. However, the larger SUVs have bigger tanks, so consumers must purchase more gas and get less effective mileage. This will increase the demand for oil, and over time and volume, increase the price of oil.

The government approves more drilling in Alaska -- Just because drilling is approved does not mean great finds or cost effective production ensues. However, let us assume that Alaskan drilling opens up several new fields that are cost-effective and profitable. Supply of oil will increase, particularly non-imported oil, and prices, at least for American consumers, should fall.

Part 4 -- If you consider a product like gasoline, would you favor price controls?

Proposals that tried to control and regulate gas prices and tax manufacturer's profits were popular ideas, particularly during the Carter years in the late 1970s. Actually, the controls were put in place by the Nixon and Ford Administrations as a reaction to huge fuel pump increases caused by OPEC reductions in production. It would have likely been better to allow gasoline prices to rise naturally and give oil companies an incentive to raise production (and therefore profits), consumers the impetus to conserve, and automakers the incentive to produce more fuel efficient vehicles sooner. When price controls were put in place, less oil was available. Consumer did not want to be without gas, so sat in long lines and felt panic about the situation (How gas price controls, 2006).