Introduction
Imagine what might happen if the crude oil price drops to what it was like in the 1990s. A fortunate news for consumers in the same time dreadful news for the producers has been announced that the crude oil price is being dropped extremely low. The current oil price is as low as $33 per barrel where it was $100 per barrel in the start of 2015. The reason why the oil price have fallen so low is because domestic production have increased a lot during the past few years, therefore pushing the oil companies out of business. Another factor is that large exporters like Saudi Arabia, Venezuela and Nigeria all are selling their oil on Asian countries, leaving Americans no choice except decreasing the price. This clearly means that the consumers are benefitting from this opportunity, but the producers are facing a tough challenge. Countries such as Iran, Venezuela and Algeria have tried convincing Saudi Arabia to lower the production of oil, although they have refused to do so. There have been rumors that Saudi Arabia and United States wants to pull Russia down. Analysts assume that there is a lesser chance for the oil price to go up.
Imagine what might happen if the crude oil price drops to what it was like in the 1990s. A fortunate news for consumers in the same time dreadful news for the producers has been announced that the crude oil price is being dropped extremely low. The current oil price is as low as $33 per barrel where it was $100 per barrel in the start of 2015. The reason why the oil price have fallen so low is because domestic production have increased a lot during the past few years, therefore pushing the oil companies out of business. Another factor is that large exporters like Saudi Arabia, Venezuela and Nigeria all are selling their oil on Asian countries, leaving Americans no choice except decreasing the price. This clearly means that the consumers are benefitting from this opportunity, but the producers are facing a tough challenge. Countries such as Iran, Venezuela and Algeria have tried convincing Saudi Arabia to lower the production of oil, although they have refused to do so. There have been rumors that Saudi Arabia and United States wants to pull Russia down. Analysts assume that there is a lesser chance for the oil price to go up.
This video talks about why Saudia Arabia is causing the huge drop in oil price.
. Market Equilibrium
There has been a very visible change in the crude oil price of America recently because of their unstable demand and supply. The demands for fuel in the European countries are getting really low as people are becoming more and more aware of oil prices. Many of these countries have been involved in creating hydro-electric energy-efficient cars so they do not have to consume oil. As the demand for oil goes down, so does the price. The other reason because America’s oil price is going down is because of domestic production. Since domestic production has increased a lot over the years, it left a very few space for the producers to supply oil. Besides this issue countries such as Saudi Arabia and Nigeria have decided to import their oil to Asian countries rather than U.S. These caused a fall in the production and supply of oil, hence the lower price. Although Iran, Venezuela and Algeria have requested to cut down the supply to increase demand, Saudi Arabia has refused to do so. This increased oil supply by the OPEC will cause the demand to go lower and so will the price. “The Energy Information Administration (EIA) reported on Sept. 30, 2015, that U.S. at almost 500 million barrels, U.S. crude oil inventories are at the highest level in at least the last 80 years, causing a decline in prices.” This certainly proves that the price is going down since demand is so low.
There has been a very visible change in the crude oil price of America recently because of their unstable demand and supply. The demands for fuel in the European countries are getting really low as people are becoming more and more aware of oil prices. Many of these countries have been involved in creating hydro-electric energy-efficient cars so they do not have to consume oil. As the demand for oil goes down, so does the price. The other reason because America’s oil price is going down is because of domestic production. Since domestic production has increased a lot over the years, it left a very few space for the producers to supply oil. Besides this issue countries such as Saudi Arabia and Nigeria have decided to import their oil to Asian countries rather than U.S. These caused a fall in the production and supply of oil, hence the lower price. Although Iran, Venezuela and Algeria have requested to cut down the supply to increase demand, Saudi Arabia has refused to do so. This increased oil supply by the OPEC will cause the demand to go lower and so will the price. “The Energy Information Administration (EIA) reported on Sept. 30, 2015, that U.S. at almost 500 million barrels, U.S. crude oil inventories are at the highest level in at least the last 80 years, causing a decline in prices.” This certainly proves that the price is going down since demand is so low.
Elasticity of Supply and Demand
Elasticity of demand is when a big change in the price can cause a huge change in the quantity demanded. There are certain products whose demand goes down as soon as the price changes. For example, CDs, movie tickets, and perfume are good examples for elastic good. As the price of these goods will increase, the demand for these goods will go down. Price elasticity of demand largely depends on price since a slight change can change the demand drastically. Elastic goods are usually the goods that are less important or luxury goods to the consumers.
In the other hand price inelasticity of demand is when any change in the price of the good does not affect the demand of the good. The products that are necessary to the consumers are the inelastic products such as oil, rice and gas. This article talks about how the oil price change has no effect on the demand. U.S, India and China have to import oil from the OPEC because it is an inelastic product. Saudi Arabia and UAE takes advantage of this situation as the price goes down. This price change is causing a negative effect on companies that largely depend on high oil price like Venezuela. One of the major reasons why a product is inelastic is because they do not have any substitutes like oil. This how the non-OPEC countries like U.S have no other option other than to import the oil from Arabs because of the oil’s price inelasticity.
Elasticity of demand is when a big change in the price can cause a huge change in the quantity demanded. There are certain products whose demand goes down as soon as the price changes. For example, CDs, movie tickets, and perfume are good examples for elastic good. As the price of these goods will increase, the demand for these goods will go down. Price elasticity of demand largely depends on price since a slight change can change the demand drastically. Elastic goods are usually the goods that are less important or luxury goods to the consumers.
In the other hand price inelasticity of demand is when any change in the price of the good does not affect the demand of the good. The products that are necessary to the consumers are the inelastic products such as oil, rice and gas. This article talks about how the oil price change has no effect on the demand. U.S, India and China have to import oil from the OPEC because it is an inelastic product. Saudi Arabia and UAE takes advantage of this situation as the price goes down. This price change is causing a negative effect on companies that largely depend on high oil price like Venezuela. One of the major reasons why a product is inelastic is because they do not have any substitutes like oil. This how the non-OPEC countries like U.S have no other option other than to import the oil from Arabs because of the oil’s price inelasticity.
Market Structure
There are four types of market structure and they are: perfect competition, monopoly, oligopoly and monopolistic competition. The oil industry is simply the oligopoly market structure since it is controlled by few but strong firms such as the OPEC. OPEC has a big influence on the oil price since it controls 40% of the oil price. OPEC contains the largest oil exporting countries. Even though the current price of the oil is fairly low, it is not affecting those countries much. These Persian Gulf countries will invest on oil less now since the price has dropped already. Even though the smaller firms of oil production have requested the United Arab Emirates to stabilize the price by decreasing the supply, they refused to do so. The Arabs believe that if they decrease the supply their competitors will buy their market share, causing their loss. This is how the Arab countries are controlling the oil price, hence the oligopoly market structure.
There are four types of market structure and they are: perfect competition, monopoly, oligopoly and monopolistic competition. The oil industry is simply the oligopoly market structure since it is controlled by few but strong firms such as the OPEC. OPEC has a big influence on the oil price since it controls 40% of the oil price. OPEC contains the largest oil exporting countries. Even though the current price of the oil is fairly low, it is not affecting those countries much. These Persian Gulf countries will invest on oil less now since the price has dropped already. Even though the smaller firms of oil production have requested the United Arab Emirates to stabilize the price by decreasing the supply, they refused to do so. The Arabs believe that if they decrease the supply their competitors will buy their market share, causing their loss. This is how the Arab countries are controlling the oil price, hence the oligopoly market structure.