Economics Newspaper Cutting
By Bianca Yip (32),
Judy Leung (14)
F.4B
News Headline: Crude price moves higher as players fear cold may boost US demand
Source:
South China Morning Post
Date:
27/11/2004
Description of the issue
The station in Iraq, where a key pipeline linking the northern oil fields to a
refinery had been attacked. This had surely interrupted the supply of crude oil. Facing
this vulnerable oil shock, the capitalist countries were seriously attacked. This
included the major leading capitalist country, USA.
Since 2003, there was a strong growth in demand for oil, on the supply side,
existing production facilities, transportation and refinery capacity could not readily
meet the increased demand. At the same time, events in Iraq, Saudi Arabia, Venezuela,
Russia and Nigeria, together with four hurricanes in quick succession in the Gulf of
Mexico, disrupted supplies and provoked panic on international markets. Then, rising
prices and the prospect of a prolonged rise in the price of oil attracted big financial
speculators into the oil futures market, pushing the price up even further. It’s believed
that due to the approaching of cold winter, the demand of crude oil will keep on
increasing. On the contrary, US is imposing enough to boost inventories, easing
concern about a fuel shortage. So whether the price will lower or higher is still too
early to make such assumption.
Explanation of the issue
The supply of crude oil is limited because oil is a non-renewable resource, it’ll
be used up in the near future. There will not be further increase in the supply of oil, so
the supply is fixed (as show in figure a) in the previous page). On the contrary, the
demand of globe does not decrease, but instead keep on increasing. The oil stations
usually were found in the less developed and unstable country. Recently, some events
broke out in these countries (for instance, riots, wars etc…) leading to a serve
shortage for oil in the world. Due to the limited supply of oil and unlimited human
wants, the oil is insufficient to satisfy all human wants. The problem of scarcity
occurred. Since oil is one of the fundamental necessities, people need to involve
themselves in an “invisible” competition and bear up a higher cost to get the oil.
(Refer to figure b)The theory of market mechanism is illustrated. All these lead to a
drastic increase in the price of the oil. Also oil being an input of production is needed
to generate electricity and make oil by-product e.g. lipstick, perfume, soap etc..
Because of the increase in price of crude oil, production cost also increases; as a result
the consumer price will increase too. Because of the increase in price and a decrease
in quantity demanded, resulted in the economic hit in the secondary and tertiary
production.
On the other hand, since cold winter is approaching, using oil to generate
electricity to operate electrical appliances for consumption (e.g. heater, electrical
water pot, home heating fuel, hydrological heating system…) will lead to an increase
in the demand for oil. But on the contrary, US is importing enough to boost
inventories, the problem of excess demand will be calmed down a little bit, it is easing
concern about a fuel shortage. As a result, either one of the three phenomenon will
occur based on the above facts:
1st: supply of oil increases (supply curve shifts right), demand for oil also
increases (demand curve shifts right), however the increase in demand is greater than
increase in supply, so price and quantity demanded will increase in this case. (Refer to
figure 1)
2nd: supply of oil increases (supply curve shifts right), demand for oil also
increases (demand curve shifts right), however the increase in supply is greater than
the increase in demand, so price will fall and quantity demanded will increase in this
case. (Refer to figure 2)
3rd: supply of oil increases (supply curve shift right), demand for oil also
increases (supply curve shifts right), however the increase in demand is equal to the
increase in supply, so price is fixed and quantity demanded will increase in this case.
(Refer to figure 3)
In conclusion, based on the fact that oil is insufficient to satisfy all human wants,
but at the same time US is seeking ways to import enough oil to boost inventories so
as to lower the seriousness of shortage. Price of oil will fall or rise or remain
unchanged. It’s difficult to determine whether which answer is correct because it’s
still an unknown in the near future.
Fig. a) In the past,
Fig. 1)
Fig. b) Now,
Fig. 2)
Fig. 3)