Oil Treasure and the Demand and Supply Theory:


Oil Treasure and the Demand and Supply Theory:

(By Sajjad Amin Bangash)

Oil Prices
The prices of crude oil have been continuously declining to almost half in the last few months. Currently in international market a barrel is sold at 56$ while in September, the price was 98$ per barrel. There is a possibility that the price will further go down till 50$. Will it further go down? Yes, there is a higher possibility but it will again rise up to 70$ per barrel.
An ordinary person always gets happy over the fall of fuel prices but he forgets to ask what causes the fall in oil prices.

The demand and supply of oil is determined by the free market mechanism. However, it is a complicated matter that why the supply increases and demand decreases and vice versa. Here, it must be understood that if the fall in prices of oil are taking place at a continuous tendency then both factors are taking place at a parallel fashion as decrease in demand and increase in supply cannot forced to be paralyzed.

There was a time when 07 of USA companies were completely holding monopolies over the prices and distribution of oil around the globe. They would extract the oil in different parts of the world, determine their prices and were the buyers themselves of their own. The leaders of weaker nations were to be paid off royalty and then the rest of oil possession was in their hold.

WTI Price Chart

In the early 60s, the oil production was widely available all over the world and more and more oil exploration were taking place at different parts of the world. But just after the Arab-Israel war, and the emergence of Moammar Qaddafi, OPEC started to function actively with the realization that ‘this precious treasure’ could not be sold at cheaper rates and demanded an adequate prices of oil or else the supply of oil will be stopped. Then in 1974, at 9$ per barrel was determined rising from 2$ and in 1978, this price rose up to 36$/barrel. Hence, oil became the ‘powerful tool’ not only for Arabs but also for every oil producing nation.

But do not forget the ugly reality that the’ the power rests with the mightier’. When the stronger comes to know the strength of weaker, then the mightier gets frightened and finds alternative ways of escape. When the western powers realized and saw that the supply control of oil went in the hands of middle east and weaker nations such as Venezuela, or Indonesia then they started to formulate ways over the control of demand of oil. Here, the Japanese manufactured automobiles became more popular as they consume lesser fuel as compared to American manufactured automobiles and better insulation technologies were introduced and started to use for heating purposes in the houses during the longer months of winters. At the same time, alarmingly the USA started to hoard the oil reserves and after several years of efforts, as a result the oil producing companies were compelled to sell the oil at a price of 18 $ per barrel. As the period of 70s was the ‘Oil Crisis’ phase for western countries similarly, the period of 80s became the period of ‘Price Crash’ for OPEC countries.

The incident of 9/11, bombardments on Afghanistan and subsequent war with Iraq by the USA and allied forces, are such events which badly effected  the demand and supply principles of oil thus resulting in incessant oil prices increase. During Iraq war, the oil price rose from 30$ to 50$ per barrel and within 02 years of time in 2007, the oil prices shot up to a highest level of 147$ per barrel. However, part of the reasons were that the continuous economic growth of Chines and Indian economies during these 02 years of time frame. There was a continuous rise of technological and industrial advancements as well. Therefore, these countries were on a higher demand of crude oil. The price level of 147$ were short temporary for up to few weeks but for the last 07 years, the oil price per barrel remains above 100$. This was the highest price level which after the fall of USSR, brought the Russia back in G-8 countries and Vladimir Putin became the 2nd powerful person of the world.

The increase in oil prices also resulted in the seek of those oil and natural gas reserves which are hidden in depth of those pores of the mountains which require expensive heavy technologies thus the drilling of those resources began. These natural resources are called ‘Shale Gas’ which are found in USA, China, Poland and Pakistan but the technologies which are used for their explorations and extractions are available only in USA.

Therefore, the United States have started to extract this ‘Shale Gas’ at a higher level that its dependencies on Arab countries have lessen to a great level. On the other hand, the economical progress of India and China have seen a slight decline which had decreased the demand of oil and the price of oil in international market began to decrease systematically.

Whenever there is a fall in oil prices, then the oil producing nations start to reduce the production level of oil thus the oil prices get stabilized accordingly. But this time, the strange fact is that the two biggest oil producing countries such Saudia Arabia and UAE are not reducing their oil production level and waiting for the further decline in oil prices in international market so that the costly ‘Shale Gas’ of United States totally wiped out from the international market. This decline in oil prices however, does not put that higher impact on the economies of higher oil producing countries but badly effects the economies on lower development countries. Although, Nigeria and Venezuela will go into the economic recessions while Saudia Arabic, Kuwait and UAE will not be that highly effected.

One big advantage of this oil price decline is highly productive for underdeveloped countries largely because with the lower oil prices, these lowest economies tend to restructure their economies and be to control the soaring inflation rates thus the general prices of commodities, electricity etc. will be reduced which will favor the income level of ordinary citizens of these countries.

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One Comment Add yours

  1. vipin says:

    Regards sajad sir. Vipin from India here.
    Nice to read ur post . it’s very informative. Like u I too have a list for knowledge but I don’t get lot of time.
    Air. Do you have any idea about crude trading. If yes, then we both can be of some help to each other I guess.
    Mail me ur reply sir.
    Thanking you

    Like

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