Monday, April 13, 2009
Supply-demand imbalance boosts oil prices
David R. Baker, Chronicle Staff Writer
Tuesday, May 27, 2008
Even as the cost of crude oil has soared in recent years, the amount pumped from the ground hasn't.
Worldwide oil production has barely budged, despite record prices. Since the start of 2004, oil's price has gone from $33 per barrel to $132. Production, meanwhile, has risen just 1.8 percent, to 84.6 million barrels per day.
That's not enough to keep pace with the world's growing thirst for oil, which has increased 3.7 percent during the same time. And the imbalance between supply and demand keeps pushing prices higher. It's one of the main reasons gasoline now costs more than $4 per gallon.
This isn't the way economics are supposed to work. When a product is in short supply, the price rises, and the companies that make it usually produce more so they can cash in. Supply eventually outstrips demand and the price goes down.
Faced with rising global demand and record prices, the oil companies have a powerful incentive to find, pump and sell as much crude as they can. Instead, they're having a hard time keeping their output level, much less expanding it. Big, untapped oil fields - often called "elephants" in the industry - are harder and harder to find.
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Source: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/26/BUHH10S61B.DTL
From this article, our knowledge of demand and supply can be used to analyze the current situation in which the oil industry is facing.
As shown in Figure 1, production of oil has increased as stated in the article, thus causing the supply curve to shift from SS1 to SS2. At P1, the quantity supplied now exceeds the quantity demanded. There is now a surplus and the industry experiences a downward pressure in price. As price decreases from P1 to P2, the quantity demanded will increase from Q1 to Q2, while quantity supplied will decrease from Q3 to Q2.
As shown in Figure 2, demand for oil is also increasing as stated in the article, thus causing the demand curve to shift from DD1 to DD2. At P2, the quantity demanded exceeded the quantity supplied. This results in a shortage and the industry experiences a upward pressure in price. As price increases from P2 to P1, the quantity demanded decreases from Q3 to Q2, and the quantity supplied increases from Q1 to Q2.
In conclusion, by combining both graphs, an increase in supply and demand will cause the overall equilibrium quantity to increase from Q1 to Q2. However due to the larger the shift in the demand curve as compared to the supply curve, the equilibrium price will increase as well, from P2 to P1. As stated in the article, the production of oil is not enough to “keep pace with the earth’s growing thirst of oil”
Post by: Crystal Beck
Updated.
Posted at: 6:23 AM
