This essay is going to provide the information about the market of the oil analysis and evaluation. In addition, information will be presented about OPECs impact on it for this financial year (Anon,2016). The essay will also use the knowledge of the course in order to find the current supply and demand for it for this year and predicted demand and supply functions. With an eye to achieving this, graphs will be used to illustrate the price of the oil and the factors which affect the supply of oil. Additionaly, the essay will nalyze the medias reporting of the price of oil.Lastly, the Keynesians short-term theory of demand and supply will be interpreted and practiced, in order to explain and analyze the prices for oil and OPECs effect on it.
Demand function simply can be described as the desire of the consumer to buy (Anon, 2016). Supply can be defined by him as well as the willingness to produce of the manufacturer (2016). The Haekal (2016) defines equilibrium as the point in which demand and supply equal can say that economy in the equilibrium. Shifts- the shift in the demand or supply curve occurs when quantity supplied or quantity supplied change, despite the fact that price remains the same (Heakal 2016). The main role in the market of oil takes place OPEC countries and other countries such as USA, Russia, China and Canada. The members of the OPEC are Republic Iran, Iraq, Saudi Arabia, Venezuela and other (Anon. 2016) .Additionally, should be said that OPEC countries were collected in order to stabilize the market of oil and supply consumers with oil in enough quantities and equitable return.
Graph- the movement of price for oil
(Figure 1)
(Anon, 2016)
The current graph shows the prices for Crude oil- Brent for the current year. It can be seen that the price for it changes, despite the fact that oil is inelastic good and easily predictable by season when there are no actions from countries. Usually, oil reaches its peak in the spring, as oil traders forecast high demand for summer vacation driving. As demand has reached it maximum it starts falling in the autumn and winter. It can be said that many factors result oil in varying rapidly. (Amadeo 2016) Moreover, should be said that it is inelastic good but it varies rapidly. It can be described as there is lot variables. Such as geopolitical factors, the economy of the countries and decisions of OPEC countries(oilprice, 2016).
The first reason why the price for oil decreases is that in 2014 forex traders has been making all of their transactions with dollars. This leads to an increase in the price of a dollar for 25% (Amadeo 2016). The biggest cause of it lead to making non-OPEC countries to tie to the dollar. With this, if exchange rate for the dollar will increase for 25% compensates the 25% drop in the prices for oil.
The second cause is that OPEC members are usually unwilling to reduce the supply. It can be described as a reduction in supply will lead to increase in the price of oil inside OPEC. (Amadeo 2016). It means that consumers of OPEC can switch to other suppliers of oil, in order to get the best deal. Also they wouldn’t be able to sell the same amount of oil, they will sell less quantity, which can lead to reduction of profit.
Focusing on the main issue now is the increased capacity of the rigs in US company named Baker and Hughes. The company has increased the number of rigs to 12, it has increased the supply of the oil in the world market which, therefore has decreased the price of oil to 44.07$ per barrel. (Corporate-ir, 2016)
S2- Supply Curve 2
S1- Supply curve 1
D- Demand curve
(Figure 2)
The figure 2 shows us that shift in supply function from S1 to S2 made a new equilibrium in which the quantity increased but the price has decreased. It can be seen by 2 lines green and red which conduct the new equilibrium.
It should also be noted, that OPEC tried to increase the price of oil, but couldn’t finalize the deal. The main reason for it, as have been mentioned second cause. Despite the fact that OPEC is not willing to reduce the supply, Daily Voice news has announced that OPEC now tries to agree to limit the production of oil which can lead to increase in price from 50$per barrel (Daily Voice News. 2016). Another factor which affected the price of oil is minister of Iran said that Iran is most likely to reduce their supply too. This has led to approximate increase in future price of oil from 55$ to 60% (APR et al. 2016)
In the best way to oil producer countries, all non-OPEC countries will also decrease the quantity production of the oil, which will lead to an increase in price and potentially price for oil will grow in the long run.
S1= Supply curve 1
S2= Supply curve 2
D= Demand
(Figure 3)
In the figure 3 can be seen that shift in supply to the left side which makes the new equilibrium. In the new equilibrium, we can see that prices have grown and quantity has decreased. From this graph can be thought why oil companies will not just decrease extraction of oil. The reason for this is that small or financially low companies in non-OPEC countries have to continue producing oil in order to pay for their debts or interest (Ailworth 2016).
In a second way, non-OPEC countries will produce the same quantity as they have been producing which will lead to a relatively smaller change in the price of oil.
S1=Supply curve 1
S2= Supply curve 2
D=Demand curve
P1=Price 1
P2=Price 2
Q1=Quantity 1
Q2=Quantity 2
(Figure 4)
In the figure 4 can be found that the smaller change in quantity than in the previous graph.
In a third way, non-OPEC countries will increase production of the oil in the same quantity as OPEC countries have decreased their quantity, which will lead to immutability for the price of the oil. This can result in a profit loss for OPEC countries
S= supply
D= demand
(figure 5)
In the figure 5 can be seen that Supply and Demand stay the same. However, the exports from OPEC countries will decrease. As OPEC countries will decrease their production capacity and other countries will increase their production.
The fourth path is that oil small companies from non-OPEC countries will decrease the production capacity and save it to sell after OPEC will get into the deal. This action will make the small companies increase the profit, which will lead to the 1st way and afterward to the 2nd.
S- supply before the interventions of OPEC
S2- supply 2
S3- supply 3
D-demand
Figure 5 shows that oil applies fourth way. Here we can see that it will lead to a shift of supply function to the left side from s to s2, and afterward to s3 relatively lower supply function than was in the S1. The difference between S3 and S can be described as a reduction of production crude oil of the OPEC countries.
The main aim of this essay was to determine the causes of oil supply function, the main factors that drives oil supply, and forecast what is going to be with supply of the oil. Furthermore, the work looks to the impact of OPEC on it. The points made in this essay supports the idea that as nowadays oil is one of the most necessary good in sense of oil indispensable in a lot of markets. It has been shown that oil may fluctuate, despite the fact that it is inelastic good. Likewise, should be added that oil supply function affects not only by OPECs decisions, also it changes by the other factors like: non-OPEC countries supply, USAs dollar power, debts of small and insolvent companies. Potential solutions may include to buy stocks oil and save your money in dollars in order to get high profit from all of this.