“Economics is the social science that examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants.” (Robert Schenk). Global oil consumption has been increasing steadily over the years. Therefore there has been increasing demand for this vital but yet scarce commodity globally. Its uses are unlimited as it is the major driver of the economy worldwide. In the world today people have chosen to depend entirely on oil as a major source of energy while its uses remain unlimited. This choice constitutes economics since oil is a scarce resource with unlimited use to the world population.
Microeconomics is defined as The operations of the components of a national economy, such as individual firms, households, and consumers (answers.com). Microeconomics involves the allocation of crude oil as a scarce resource among the many alternative uses. For instance, the East coast of the country consumes the highest amount of crude oil more than any other part of the country. (Fedstats.The USA. Dept.of Energy) The department also reported that more than 25% of crude oil in the gulf coast was not consumed as energy but rather as a feedstock to make petrochemicals and petroleum-based products. In the sparsely populated area of the Rockies there is low consumption on an absolute basis, but relatively high consumption per capita.
The law of supply is defined as A microeconomic law stating that all other factors being constant when the price of a good or a service increases, the suppliers will raise the number of goods or services they supply to the market and vis-à-vis. (investopedia,2008). According to (Geoff Riley, Eton College, September 2006) some of the factors affecting the supply of oil includes profit motive, stocks, exploration, external shocks, and the spare capacity. With these factors remaining constant as the global price of crude oil increases its quantity supplied to the markets also increases. As the price per barrel increases its supply is increased.
The law of demand is described as A microeconomic law stating that all other factors being constant, as the price of a good or a service increases, consumer demand for the good or service will decrease and vis-à-vis. According to Geoff, when the economy is growing, there is an increase in demand for oil. For instance, in the Chinese economy, the rapid growth of national output in energy-intensive sectors has resulted in a flow in demand for crude oil into the Chinese economy.
There are various factors that can lead to change in demand according to Geoff Riley, one of these factors is changes in climate. In North America for instance there is an increase in demand for heating oil during the severe winter. The price increases as economies in this region demand more crude oil for heating systems and households.
Market speculation is another factor that causes a change in demand for crude oil. Speculators flock oil market to buy surplus oil futures contracts so as to inflate their profit margins.
Demand can also change due to substitutes, incase in future researchers come up with cheaper oil substitutes demand for oil will shift. This will have a great impact on the energy market for oil since people will go for the cheaper oil substitutes. Global economic growth has shifted the demand for crude oil. Oil has always been a vital input in industrial production. When there is a steady growth in the economy demand for oil increases. For example, the global increase in oil demand has been caused by economic growth in countries like China, Brazil, and India which have sectors that require high amounts of energy.
Change in the supply of oil is different from oil demand. Factors that affect the supply of oil globally are categorized into short term and long term. In the short run, the supply of crude oil is affected by the current level of stock that is available for supply to the major oil refineries. For instance, a high level of stock translates to an immediate quick supply of oil when demand changes.
An external shock is another factor affecting the supply of crude oil. External shocks may include military wars and terrorist attacks in oil-producing countries. Therefore, the oil supply is disrupted. The level of spare capacity in the production of crude oil also plays a significant role in the supply of crude oil. One of the long-term factors affecting the oil supply is oil reserves. When there is depletion of oil reserves supply will reduce. Demand for oil is quickly leading to the depletion of oil reserves.
Technological innovation more often leads to efficient methods of oil extraction. With technological change, the prices are expected to increase thereby increasing supply since the cost of production goes up.
Financial investment into oil exploration will in the future affect the supply of oil. With the increase in demand, more resources are directed towards exploring more oil reserves. With more oil reserves supply will increase. Consumer needs are entrenched in the theory of demand while the needs of the manufacturer are entrenched in the theory of supply.
According to (EAI Demand article), the industrialized countries are the largest consumers of crude oil. This high consumption is a result of rapid industrial consumption in these countries. The partly high population could be a reason why there is high consumption in industrialized countries. The USA for example is one of the highly populated countries in the world. This is why the demand for oil in North America is high.
The demand for oil has also been increased in the USA due to military activities in foreign countries like Iraq and Afghanistan. More jet fuel is required for plane jets and more oil for tankers on the ground. Therefore, this has increased the price of crude oil. With the increase in price, the supply of crude oil is increased.
The high numbers of private vehicles on the roads of North America have lead to the shift in the demand for crude oil. This large number of vehicles translates to an increased need for crude oil.
There has also been grading of crude fuel to make it environmentally friendly since crude oil contributes to the depletion of the ozone layer. Therefore, there have been new technologies to produce environmentally friendly petroleum products. The use of new technologies leads to improvement in the quality of petroleum, this, in turn, translates to increased prices. A price increase will always affect supply.
Due to the scarcity and increased demand for crude oil in North America, some people will start leaving private vehicles at home and go for public means of transport like buses. With fuel prices likely to continue skyrocketing majority of the population will be more willing than ever to stop using private vehicles and instead use cheaper means like trains.
In order to survive during the severe winter in North America, the demand for crude oil goes up. During this time oil is used to warm up homes and places of work. The prices during this time are therefore likely to be high. It is evident that the transport industry consumes more of the oil supplied in North America than any other industry. On the other hand, oil is used in generators to produce electricity.
Energy Information Administration. Demand. Retrieved 8th, 2008. Web.
Geoff Riley, Eton College, 2006.
Investopedia. Law of supply. 2008. Web.
OPpapers. Consumption. 2008. Web.
Robert Schenk. Microeconomics. 2008. Web.
Tutor2u. Economics. 2008. Web.