Economic Essay Example | Topics and Well Written Essays - 1750 words

Economic - Essay Example Technological advent has propelled the demand for the fuel around the world irrespective of the price of the same. On the other hand, being a natural resource with exhaustible limits, the fuel cannot be exploited boundlessly. The present research attempts to evaluate the trends in the demand and supply volumes of the commodity. Objectives and Research Questions Rationale behind the policy measures undertaken by different economic agents revolves around the profit that they are likely to yield as a result. As oil is regarded as one of the most important raw materials and hence is a decisive factor behind profit generation, it is highly important to keep a track in the price fluctuations of the same. Purpose of this study will be to analyse the gap between demand and supply of oil during 2000-2005 which justifies the price fluctuations of the commodity. In cases of excess demand, prices are likely to soar high in contrast to situations of excess supply. Thus a suitable research questio n in this case will be to assess the association between policies and availability of oil in the market. Factors determining demand and supply of oil Factors affecting demand of oil Firstly, globalisation has increased the demand of various nations for crude oil which has added to the already high demand for the same. Nations undergoing a period of transition pose a high demand for oil which is regarded as an essential raw material for production. As they are almost always in a rush to improve their economic growth rates, their demand for the fuel is proportionately high. A good example is that of China which has multiplied its demand for oil post the advent of the new millennium, due to similar issues (Energy Information Administration, 2005). Secondly, speculations about political turbulence in the producer nations or chances of stringent ties with their customer nations could lead to hikes in the present demand of oil as the latter want to store more and more reserves of the same . Similar could be the situation when there are possibilities of exchange rate system depreciating in the importing economy. In other words, economies rising high on inflation are likely to demand less of the fuel. Although they might be the consequences of political disruptions, the consuming nations often end up purchasing large stocks of the fuel hence raising its present demand (Pirog, 2005). Lastly, demand for oil is highly dependent upon the availability of other substitute fuels such as coal or natural gas. Regions, which are rich in these resources or could trade them at cheaper prices, attract a lower demand for oil. Moreover, stringency in OPEC policies is also a reason behind the aggregate demand for the fuel. Factors affecting the supply of oil Firstly, the supply function of oil is positively related to the market price of oil in the past. A low market price is of little incentive for the producers who invest lower sums in building refineries and discovering oil mines, to maintain high volumes of future crude oil supplies (Allen, 2005). In addition, higher the market rate of interest is, lower will be the long-run supply of oil in the market as investors will be less attracted towards borrowing and would rather prefer to deposit their money in safe locks (Spann, 1979). Natural catastrophes could prove to be hazardous