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How Markets Work

As time goes by, the transportation sector is affected with the ever increasing problem of the soaring oil price. Almost every month, there is at least one oil price hike imposed by our local oil distributors. Though the government states that they were trying to stabilize oil price as much as they can, the price of oil in the global market still has the final say. Private car owners, that could not withstand the increase in their gasoline cost, cut their driving time as much as possible by eliminating some of their leisure trips.

The common people are indirectly affected because deliverer of the commodities in the market commonly passes their additional transportation cost to their buyers. But before going even deeper to these domino-like after effects, we should first know why the oil prices change and why it does usually undergoes to a series of price hikes rather than the unusual price rollbacks. Does the price hike is cause by the increasing oil consumption? Is it the rumor that the world’s oil tank is now half empty should be blamed? Or is it just the desire of oil refinery owners to acquire more income?

Do the government’s actions are sufficient enough

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for this economic issue or do these actions just add up more to the problem? Why Change Price To know the reason for the change in price is firstly we should be knowledgeable with the ruling economic laws for the supply and demand. Basically, the law of supply says that the higher the price of the product, the more the seller will supply. Going back into the olden days, price had been part of every transaction by the seller to its buyers. Price serves as the guaranteed incentive earned by the seller coming from the buyer.

Without a fixed price, trading would be impossible to take place. Now going back with the oil prices, if the oil producers were to be guaranteed with such an increase in their commodities price, then there would be a great chance that they would increase their production. But this law does not act solely to the ever changing price of oil. The law of demand acts somewhat as a control to the law of supply. The law of demand states that the higher the product’s cost, the less the consumer will demand. This is the law that Neil King Jr. of the Wall Street Journal Online is basing for his article, Soaring Oil Prices Could Hit a Speed Bump.

On his forecast for the future of the oil price, he is pretty sure that though he thinks that the oil price surge of 2007 may not be over yet, there were signs according to him that could spark an emerging decline to oil’s price putting the $100-a-barrel out of reach for the near term. This is because there were signs that there would be a decline in the oil demand of the United States and Russia, he explained. This claim could also be supported with the constant production output of Saudi Arabia, Iraq and Angola, together with the slight strengthening of the dollar (King, 2007).

Reason of the Soaring Oil Price Now that we know the two laws governing the control of price of a commodity such as oil, we should then continue the search for the root cause of its soaring price. A good start for this would be to know what causes the demand for oil. For a brief background, ever since the start of the industrial age, crude oil or the petroleum had increased in demand dramatically because it is needed as one of the primary source of manufacturing plants’ energy.

With the invention of the automobile together with other vehicles that runs on diesel, a by-product of crude oil, the industry of oil refinery had peaked up (“Our Petroleum Challenge”, 2004). Countries had raced in search for more oil wells. It is possible that there were no production quotas imposed in the early boom of the oil industry so as to meet the ever increasing demand both in the local and the global market. Price had somewhat been stabilized with several ups and downs in response to the change of supply and demand.

Since oil had increased in importance over the years, countries having conflict had used this so as to damage one’s economy (Krugman, 2002). And this had marked the start of the agony of oil consumers. After past conflicts had been resolved, then came the scientific finding that oil production should not go into full extent on a basis that oil is a non-renewable energy. According to Actis Science resource centre, oil is considered one of the non-renewable resources alongside with gases, because they would not last and would take a very long time to replenish once totally consumed.

The oil we were using is the product of the million of years built up of dead animals and plants into layers of mud or other sediments. The Earths pressure and heat had changed these remains into oil and natural gas. Realizing that oil is a non-renewable resource, oil producing countries had then imposed production quotas. This had made supply shortages for the industrialized and developing countries. Government intervention comes in to take control of the situation. In modern day economics, government’s action is now proven to greatly affect on how its economy would behave.

For example in the United States, which was the former top oil producer, to meet its oil demands even though it can provide its own source of oil, it had chosen to import oil from other oil rich countries so as to protect and conserve their estimated oil reserves (Energy Information Administration, US). Government from almost all nations is now pursuing for energy source alternatives. They give subsidies for such studies on how their country could lessen, if not totally be independent from this ever popular energy source.

References

Non-renewable Energy Source. Actis Science Resource Center. Retrieved Nov. 20, 2007 from https://www.wsj.com/europe

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