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Question:
The demand for a product reflects the consumer’s desires or willingness to pay for the product at a particular time. Purchasing power of a consumer is important in this aspect. Fulfilment of desire is only possible by the purchasing power of any consumer. Setting all other factors constant, there is a negative relationship between demand and price (Bowen and Sosa 2014). The supply of a product is the amount of product available in the market to consume at a particular time. All other factors setting constant, supply has positive relation with price. The other factors play an important role in determining the demand and supply of a product (Baumol and Blinder 2015).
Here, oil is the chosen product. The reason behind the choice of oil, it is very important product for any economy. It has various uses, especially in manufacturing and transport sector. Price of oil is a determining factor of demand and supply. There is some other factors play a crucial role in determining the supply and the demand for oil in the market. There is a discussion in this field as follows (Basher, Haug and Sadorsky 2012).
Oil is one of the most precious resources to the world. It has several uses in all most every field of an economy. It may be manufacturing, transport, apparatus in agriculture and household day-to-day activities. These wide applications of oil, makes its name as black gold (Cashin et al. 2014). However, in almost all countries faces an oil constraint in their uses. Oil is non-renewable and exhaustible resource. It depletion rate is not matched by it’s replenish rate. Therefore, supply of oil is not unlimited. Oil and Petroleum Exporting Countries has a large amount of oil to supply to the world. However, it is not so sufficient storage of the oil to sustain its supply to the world for a long period (Baumeister and Peersman 2013).
There are some factors affecting the demand and supply of the oil. In Australia, the usage of oil is being increased. Therefore, a sustain increase in oil production is very important. In the demand side of oil, the causing factors are price, taste and preferences regarding the oil-using product, changes in the supply and price of the substituting or complementary product, income of the people, and changes in the number of oil-using people, advertisement expenditure and most importantly the expectation and speculation regarding the future price (Basher, Haug and Sadorsky 2012).
In the supply side, the affecting factors are price, production cost, the climatic and natural condition, using of various technologies, resources availability and their prices, cost of transportation and various policies of government including fiscal and monetary. The market demand and the market supply of oil intersect at the point of equilibrium. In the following diagram as the price of the oil falls the demand for oil increases. Similarly as the price rises, supply for oil also rises. This fall or rise in price makes movement upward or downward along the demand and supply curve. If the other things as discussed above changes other than price, there is shift of demand and supply curve (Baumeister and Peersman 2013).
In the following figure, horizontal axis measures quantity and the vertical axis measures price. Shifts in the demand and supply occur because of various affecting factors other than its own price.
Figure 1: The Shifts in the Demand and Supply Curve.
Source: created by author
Empirical evidences show there are various factors that determine the demand and supply especially in Australia. These are:
As the population grows, there is an increase in the oil consumption. This increase in consumption results increase in the demand. This increases consumption of oil. Therefore, supply has to increase accordingly (Aph.gov.au. 2016).
Oil is an exhaustible resource. There is limited amount of reservation of oil. Therefore, it has no cost-free usage. To meet the requirement of sustainable development concept, present generation meets their needs without compromising the needs of future generation. Therefore, if there is plenty of oil reservation, still use of excess amount of oil causes problem for present as well as for the future generation. Therefore, consistently, there is a sustain rise in price of oil (Qer.com.au. 2016).
In case of exchange rate, it has a direct relation to price of oil. Exchange rate has an impact on the oil-importing and exporting countries. Devaluation or appreciation of a country’s currency related to other country’s currency makes an impact on price of oil. This increased or decreases oil price has an impact on the demand and supply of the product (Aph.gov.au. 2016).
Here, environmental factors affect the demand and supply of oil. Favourable environmental events or natural climate helps increase the supply of oil, however unfavourable events hinders the consistent supply of the oil (Basher, Haug and Sadorsky 2012).
Political issues play a crucial role in this regard. There are various political issues regarding the demand and supply of the oil. There are applications of various high tariffs and quotas in this respect (Zhang and Fan 2013).
There is a speculation in the oil market. Market of the demand and supply of the oil, there are so many expectations and speculation regarding the future price of the oil. This speculation makes the price of oil volatile. Traders of the oil market work on various contracts to take the advantage of the change in the future prices of oil (Aph.gov.au. 2016).
These are the major factors affecting the demand and supply of oil. Therefore, almost all nations of the world like Australia face the same impacts of change in demand and supply.
Therefore, from the above discussion it is true that there are several factors affecting the demand and supply of oil. Most important factor among these is price of oil. It also true that price of oil also is a function of various factors.
However, the other determining factors are changes in the oil consumption, exchange rate, reservation of oil, political factors and speculation regarding the future price.
Taking into account all these factors, the demand for oil is very large where as it has the limited storage. Therefore, alternatives of oil-using procedures and products are very important for sustainable development of the economy.
Aph.gov.au. (2016). Chapter 2 - Future oil demand and supply – Parliament of Australia. [online] Available at: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Rural_and_Regional_Affairs_and_Transport/Completed_inquiries/2004-07/oil_supply/report/c02 [Accessed 10 Aug. 2016].
Basher, S.A., Haug, A.A. and Sadorsky, P., 2012. Oil prices, exchange rates and emerging stock markets. Energy Economics, 34(1), pp.227-240.
Baumeister, C. and Peersman, G., 2013. The role of time?varying price elasticities in accounting for volatility changes in the crude oil market.Journal of Applied Econometrics, 28(7), pp.1087-1109.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.
Bowen, W.G. and Sosa, J.A., 2014. Prospects for faculty in the arts and sciences: A study of factors affecting demand and supply, 1987 to 2012. Princeton University Press.
Cashin, P., Mohaddes, K., Raissi, M. and Raissi, M., 2014. The differential effects of oil demand and supply shocks on the global economy. Energy Economics, 44, pp.113-134.
Qer.com.au. (2016). Australia's oil supply and demand | Queensland Energy Resources. [online] Available at: http://www.qer.com.au/understanding/need-new-fuels/australias-oil-supply-and-demand [Accessed 10 Aug. 2016].
Zhang, H.Y., Ji, Q. and Fan, Y., 2013. An evaluation framework for oil import security based on the supply chain with a case study focused on China.Energy Economics, 38, pp.87-95.
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