Examine the Factors That Determine the Price of Oil in the Market. How and to What Extent Could Government Policies Affect Oil Prices? Essay

Words: 3206
Pages: 13

An Economic Analysis of the
Current Oil Market & Prices

PREPARED BY: Teoh Chern Shi

ID NO: B0075JMJM1112


SEMESTER: Semester one

LECTURER: Ellie Semsar

DATE: 20th February 2012


* Table of Contents Table of Contents 2 1 Objective 3 2 Introduction 4 3 Analyze Current prices of oil 5 4 Factors determine the price of oil 7 4.1 Demand and Supply 7 4.2 Exchange Rate 9 4.3 Location 9 4.4 Government policies affect oil prices 9 5 Factors that Determine Market Oil Demand 10 5.1 The price of the main product 10 5.2 The price of
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People will still buy the product when the price increase or decrease.

As an example, when the price of oil increases by 10%, the demand quantity of oil will drop only 5%. The suppliers make profit when they increase the price, so this cause oil price always increases.

Price of oil (USD)
Oil Market
Supply Curve
Demand Curve
Weak Response

Figure 6: Inelasticity in demand to price changes

However, consumers will take time to adjust their consumption patterns to price changes; this will cause the oil price become more elastic for long term. For example, they might replace their oil or gas appliance with electric. Moreover, producers might invest and introduce substitutes, for example, they introduce fuel-efficient cars when the oil price increases in mid 1970. (Refer to section 5 for factors that determine the demand of oil)

At the supply side, the oil production process including producing and importing crude oil, refining, distribution and storage. The price of oil will increase when there are problems at the one of these processes, for example, refinery outages, supply cutback, and etc. The price of oil also will increase when political problem in oil production area. (Refer to section 6 for factors that determine the