Words: 579
Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price in a given time. The rising price of oil will have certain impacts on the market because oil is important to nearly all areas of economy. Market is an actual or nominal place where buyers and sellers interact (directly or through intermediaries) to trade or purchase goods and services. In figure 1 above, it shows the market for oil in the economy and how the changing oil prices will impact in the market (assuming other factors are constant, coteries Paramus).
As you can see, the supply curve shifts from SSI , which tells us less quantity of oil being supplied (from Y Yell) by Iran, Pope’s second-largest oil producer due to a military attack from Israel or the US after the negotiations about Iran’s nuclear program hasn’t succeed and some acceptable compromise achieved. Moreover, a shift in supply curve leads to the new equilibrium price as it’s drawn in the graph (Sq Gel) and thus the mineral price level will increase from (Pee peel) and the firm has risen its price to maintain its revenue.
Whenever there’s a shift of either demand or supply curve, the market will, if left to act alone, adjust a new equilibrium. This means when the price of oil is increased/decreased, new equilibrium position is made. This graph also tells us the elasticity of oil is highly inelastic which means the price of oil is volatile. The price can change widely because it won’t effect a significant change in the quantity demanded, as there’s still no substitute good for oil. Furthermore when the price of oil goes up, generally the price of other goods like cars and motorcycles will increase as well because they both complement each other.
Rising oil prices usually promote a negative reaction from most people. While there are definite disadvantages to high oil prices, there are some indirect effects that aren’t necessarily good or bad, just not always expected. The definite disadvantages would be a country that’s heavily rely on oil to maintain their growth rates, like the LIST will eventually decrease its output resulting lower GAP and if the price of oil peps increasing in the upcoming months, it will have a higher inflation that leads to that country in the bottom of the trade cycle (see figure 2) or recession situation.
As you know, a recession country will experience high unemployment because firms have to cutback their output in order to obtain profits due to an increase cost of production. However rising oil prices can boost alternative energy discussions, and in turn, investments are routed in that direction and this helps create jobs therefore it will reduce the unemployment rate of that country. Also when oil prices go up, many investors look elsewhere for investment options and this has a stimulating effect on the economy.
Both demand and supply-side factors create instability in commodity markets. As a result, the best solution would be the government intervene the market by operating a buffer stock scheme to protect prices from extreme fluctuations. To do this, the government sets a price band with a highest price and a lowest possible price. It then intervenes in the market whenever free market forces push the price either above the top price or below the bottom price.