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Demand & Supply & Oil Prices

According to Irfan (2008), on the demand side, growth in private and industrial consumption was responsible for the price hike (P. 26). Industrial consumption came mainly from the emerging economies of China and India as these countries saw record export led GDP growth. Private consumption came from across the board including the developed and developing countries. Rising incomes coupled with low interest rates, low fuel costs and a weak dollar encouraged private car ownership at the expense of using public transport.

This trend was particularly evident in Europe, China, India and Pakistan. This led to the demand curve to shift upwards and to the right, causing quantity demanded to rise and price to increase. On the supply side, militant attacks on the production units in Nigeria followed by strike calls, adverse climatic conditions in the Gulf of Mexico hindering smooth production and the fact that processing capacity at oil refineries failed to keep pace with oil demand were important constraints to a stable price.

While OPEC increased, albeit reluctantly and under pressure, total output, the net effect was minimal so that where the supply curve did shift downwards and to the right causing quantity supplied to rise, it did not out do

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the rise in quantity demanded. Falling Prices (Mid 2008 onwards) Starting June 2008, the price of oil has tumbled down from $140 a barrel to rest at its pre 2007 levels of below $40 a barrel.

According to Mithani (2008), the reasoning is attributed almost entirely to the slowdown in the world economy as a result of the credit crunch following the collapse of the housing market in the West as a result of the sub prime mortgage crisis (P. 43). Credit off take has fallen considerably as Banks, worried about their own financial strength due to the toxic assets they carry on their balance sheets and the failure of peer banks (including giants like Lehman Brothers), have curtailed lending, literally freezing the credit markets.

This implies less funding being available to corporations and individuals alike which have reduced demand pressures in the world economy as purchasing power has dropped. Furthermore, recessionary times have called for massive cuts in corporate as well as private spending as corporations cut costs to survive and individuals try hard to make ends meet as job losses become the norm. In these circumstances, the demand for private transport in particular and transport in general has fallen.

There has been no major hold up on the supply side, meaning that the net effect was that the demand curve moved downwards and to the left, causing a contraction in quantity demand and a fall in price. January 2009 Oil prices rose in January, driven by expectations of demand and supply going forward as the year progresses. Demand expectations caused a downward trend as the recession began to take hold of much of the industrialized world, causing the demand curve to shift downwards and to the right. Pirate activity on the Gulf of Aden and labor issues in American refineries pushed expectations of future supply downwards.

OPEC’s announcement of an output cut and a renewed commitment to further cuts in production also helped the price rise. Thus, the supply curve shifted upwards and to the right, causing quantity supplied to fall by a greater amount then the fall in quantity demanded, leading to a higher net price. References: Irfan, S. (2008, July 15). The Oil Bubble. Financial Flicker, 2, 26-28. Mithani, S. (2008, December 28). Economic Downturn – Global Recession. Financial Flicker, 4, 42-43 WN Network, (2009). Oil Prices 30/01/2009. Retrieved February 14th, 2009, from http:// http://archive. wn. com/2009/01/30/oilprices/index. html

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