Why the laws of economics don’t work well with oil?

Question

Discuss why demand and supply analysis cannot always explain events in the oil market.Focus your attention on the short-run and the long-run adjustments in the oil market in your analysis.

Answer 1

what? the oil industry protrays the 'prime' example of how demand and supply works.
if oil workers are kidnapped in the Niger Delta for which reason the oil companies cut production by as much as half a million barrels per day the oil prices shoot up. have you forgotten what happened during the gulf wars when oil prices hit the $70 mark because oil prod. was cut by almost half as a result of reduced production and increased cost of delivering oil from the gulf regions.

take care you dont fail your assignment with your kind of analysis.

Answer 2

Oil is desperately needed for everyday life, so demand in the short run is very inelastic. In the long run, the demand is inelastic too, since there are no reasonable alternatives in the view of many.

The supply side is controlled by a few large companies/countries or a combination of these. They obviously set prices to exploit the inelastic demand (as prices go up, the decrease in quantity traded is not large enough to offset the gains from higher prices, ensuring higher revenue and profits).

But, the supply side has to be careful not to drive prices so high up that people pump enough money into search for alternatives.

What you need to see is that it's a long term game in a market with demand being inelastic in the short run and the supply side having few members who collude. It's a game theory thing, not a straightforward demand and supply thing.

And that brings us to the real world.

It's a game, therefore it is played by agents. We therefore have the principal agent thing. The second complication is the fact that markets do not have perfect information, therefore rumours and so on cause wild swings, and information manipulation is successful as a price manipulation strategy.

Just think about it. Right after the US went into Iraq, the price of oil skyrocketed and it has stayed up there since. Sure there were burnt wells and damaged infrastructure it seems. But wasn't Iraq forbidden to trade on the world markets prior to that? Does the US intervention bring stability to the region, and remove the restrictions on sale of Iraqi oil, therefore increasing supply and decreasing the risk factors? So why didn't prices fall? Why didn't the price fall even on the futures market?

In sum, economics still works, but you should look beyond simple demand supply analysis and see the market as a series of interrelated interactions.

Answer 3

Ah yes, supply and demand (in the oil markets)LOL. It's really quite simple: The oil companies cut their production when the demand is lower (prices are generally lower when demand is lower). In doing so they create less supply than demand and here we go: as a result of that the prices go higher.This of course doesn't happen as fast as switching on a light,so that is why we have the weird swings in pricing.It's all a big conspiracy by oil companies to rape us financially.And as for alternative fuels,when that really becomes viable then I'm sure we'll all be looking at oil prices much ,much lower than we thought possible.But when the demand for those "alternative fuels" becomes great then the prices will follow suite. We're not going to win when it comes to that game.It's all designed to keep our addiction to energy a very well paying proposition for oil companies,or companies that produce alternative fuels.
It actually has nothing to do with low oil reserves around the world.Canada has the second largest oil reserve in the world (Alberta oil sands project) second only to Saudi Arabia, and no one know how big that is.When our oil reserves begin to run low I'm sure they will drill find new caches of oil,again it's all about keeping the price of oil high (supply and demand).
Did you ever notice when a single refinery goes down (ie. the hurricanes in the Gulf of Mexico) that because of that world oil prices go up.Why?. Because there aren't enough refineries to meet the ever growing demand for oil.Why don't they built more?. Then the supply might exceed the demand and drive prices down.When, and if oil reserves ever dry up and I'm sure they will sometime in the future, there will always be a energy source (renewable or otherwise) that will be manipulated so as to keep the prices high enough to make the corporate CEO's rich beyond their dreams.After all it is the world's greatest addiction,why not feed it and get rich in the process.
Money, (or the wanton lust of it) is the root of all evil today.

Answer 4

why doesn't it work with oil??
short term oil is very inelastic. oil follows the basic supply and demand laws. OPEC is a cartel that controls the majority of the oil supply. maybe your just confused because of all these circumstances. because if you take all these economic laws you can come up with some kind of model with oil.

since OPEC controls the supply then they control the supply side of oil. Oil is very inelastic in the short term so the demand side does not fluctuated much, so OPEC pretty much can control the pricing, until one of the Cartel members stabs the other in the back and then oil falls until OPEC meets again.

now, in the long run oil is elastic so people will want to slowly replace oil long term wise.

Answer 5

First of all, the words "can't always" are a loophole the size of a planet; nothing can ALWAYS explain anything. However, and ironically, irregularities in the price of oil are explicable in terms of the bargaining between oil producers and oil consumers for things other than oil. Back in the day, the Shah of Iran probably sold us oil cheap--but he was purchasing that most expensive of all things, political security. In other words, deviations from the price set by the law of supply and demand resulted from the law of supply and demand for things other than oil.

Answer 6

The market works fine. But now you have more speculators out there. They are called hedge funds. They buy up oil contracts and drive up the prices. When an oil sheik wants to quote some oil company a price for oil, he goes to his computer and looks up the price at the NY Commodities exchange. He doesn't hagle with the oil companies. The price is determined on Wall Street. That's why we need to force hedge funds to disclose their investment holdings. If we know what they are investing in, we have more information about what is influencing prices.

Answer 7

Nonsense, the laws of economics work perfectly with oil. But an analysis must recognize that lots of geo-political factors affect supply, things affect demand, a chunk of the supplier market is influenced by a cartel, and socialism often rears its ugly head.

Answer 8

The laws of economics;
!/ Nobody knows why shares rise and fall.
2/ Nobody can predict the future.
3/ Exploit greed and you will make a killing

Answer 9

how about i gave you my email address, then you can send me every other other assignment and piece of homework you cant be bothered doing yourself