Opening Trigger 5 has definitely been the most difficult one so far. Trying to understand a complicated article about the oil industry followed by long minutes of staring at the board trying to come up with the best question that would help us understand the issue. Finally, with a significant help of our tutor we agreed that the topic of supply and demand in the oil industry can be covered by answering the following questions:
1. What is supply and demand
2. Why is oil demand still increasing? (Despite forecasts of decline)
3. How do alternatives to oil affect it's demand
All of the questions should be closely related to the oil industry, one of the most crucial industries there are.
a) Supply and demand
Since I studied economics for two years and went through both, micro- and macro-economics course, I would say that I have a solid knowledge about the concept. Still, it doesn't hurt to refresh what I already know. I found two short videos summarizing the main idea and what I liked the most, it explains everything on an clear, easy example of milk and cereals.
It is necessary to include a picture of the so well known demand curve:
It shows the relation between the price of a product and the quantity people buy. Logically, the higher the price, the less amount of it are people willing to buy. Eventually, the price will rise so much, that consumers won't be willing to buy any amount of products. So speaking of the case of oil, If oil prices go down, car owners will start to use their cars more to for example go to work or on trips because petrol is cheaper for them.
On the other hand, if oil prices and additionally petrol prices go up, car owners will prefer to go by bus, because it will be cheaper for them. Also if car owners would pay higher price for oil while having the same income, they wouldn't have enough money for other necessary expenses like food, rent,...
Important thing to remember is that if prices go up the demand remains the same, the change will be in the quantity of products customer will buy.
The whole demand curve would shift in the following cases:
- a drop in prices of supplements. If the price of electric cars dropped rapidly, consumers would start buying them rather than traditional cars -> the demand for oil would decrease.
- consumer expectations. If large oil companies will announce that the world will soon run out of oil, the demand for oil will decrease again, people will start to worry and will try to find supplements.
- Price in related products. If for example the price of cars will grow dramatically, people won't be able to afford them and thus they won't buy petrol either, since they will not need it.
- Number of consumers
- Income
Very in-depth analysis of supply and demand of oil in 2017 can be found on the CBNC website: https://www.cnbc.com/2017/09/13/global-oil-demand-to-exceed-expectations-in-2017-says-iea-opec-cuts-supply.html.
The supply curve has the opposite direction:
The supply is looked at from the company's point of view. The curve goes because because the higher the price on the market is, the more companies are interested in selling that specific product to get revenue. So in oil's case; if the price of oil is growing, more investors will try to find new oil sources because it is convenient to invest in. On the other hand, if prices go down, investors won't be interested in investing in oil but they will find new, more profitable areas.
Again, the change in prices will only result in different quantity of products offered on the market, but the supply and it's curve will remain the same.
The changes in supply are caused by the following reasons:
- Price of resources and technology. If it becomes too expensive for the producers to mine oil, they will eventually move on to different raw materials.
- On the other hand if new technologies are introduced that help to mine oil more effectively for lower price, the supply of oil will increase.
- Taxes and Subsidies -> if the government introduces new taxation policy (as a part of environment legislation for example), the suppliers won't be able to produce the same amount for the same price.
- and again- predictions of investors.
b) The increase in oil demand
Finding a good source related to this topic, where I would understand what the author is trying to say was nearly impossible. Finally I found one: https://paleofuture.gizmodo.com/weve-been-incorrectly-predicting-peak-oil-for-over-a-ce-1668986354, which for me explains the problem very well.
The author basically reviews that during the 20th century, people became depended on oil and that currently any real end of so-called fossil-fuel based economy. It's actually really funny to see, that the prediction from early 20th century showed that the world with run out of oil in less than 10, in some even less than 5 years. These predictions have been appearing once in a while for more than a century and even though they basically filled first pages of newspapers (which used to be the only source of information) nobody really seemed to care and the selling of cars has been growing up rapidly. People just don't take that danger seriously. Not even environmental issues. As Matt Novak states at the threats about running out of oil sources has no impact on the demand for oil.
Another problem is, that many developing countries are now getting somewhere, where developed countries were thirty, twenty years ago. Recently, women in Saudi Arabia have been allowed to drive a car, the economy in India is growing, all of these will have a significant impact on the demand for oil. As shown in the picture below:
An excellent article can be found here: https://www.forbes.com/sites/judeclemente/2017/05/29/the-steady-drumbeat-of-more-global-oil-demand/#20776aa85e2d.
Another problem is, that many developing countries are now getting somewhere, where developed countries were thirty, twenty years ago. Recently, women in Saudi Arabia have been allowed to drive a car, the economy in India is growing, all of these will have a significant impact on the demand for oil. As shown in the picture below:
An excellent article can be found here: https://www.forbes.com/sites/judeclemente/2017/05/29/the-steady-drumbeat-of-more-global-oil-demand/#20776aa85e2d.
An excellent article can be found here: https://www.forbes.com/sites/judeclemente/2017/05/29/the-steady-drumbeat-of-more-global-oil-demand/#20776aa85e2d.
I especially liked the following quote:
"But, I love oil. Oil was there for me when I needed it most: a flight to Guadalajara two hours after we learned my wife's mom passed...rides home from the hospital after the birth of my two daughters."
It shows that we need efficiency, speed and as long as oil is the only way to get it we don't care about anything else, at least 99% of us.
3) Alternatives to oil
Alternatives to oil are a very popular topic in the news, especially in the world of technology and for example Tesla cars are showing of at all big events.
As always, I like to look at thing from a different perspective and usually try to see the negatives instead of positives :D The same author as the one, who wrote the previous forbes article published another one called Bio-fooled, where he clarifies a lot of myths about bio fuels and that most of them are actually even worse for the environment than oil.
The biggest problem about them is a great inefficiency, higher amount of emissions and driving up the costs of heating and food.
Sources:
ACDCLeadership. Demand and Supply explained. URL: https://www.youtube.com/watch?v=ewPNugIqCUM. Accessed: 2. October 2017.
CNBC. Global Oil Demand to exceed expectations in 2017, says IEA; OPEC cuts supply. URL: https://www.cnbc.com/2017/09/13/global-oil-demand-to-exceed-expectations-in-2017-says-iea-opec-cuts-supply.html. Accessed 2. October 2017.
Empire Center. Bio-Fooled. URL: https://www.empirecenter.org/wp-content/uploads/2015/05/IssueBriefSpecial.final_.pdf. Accessed: 2. October 2017.
Forbes. The Steady Drumbeat of More Global Oil Demand. URL: https://www.forbes.com/sites/judeclemente/2017/05/29/the-steady-drumbeat-of-more-global-oil-demand/#20776aa85e2d. Accessed: 2. October 2017.
Investopedia. Demand Curve. URL: http://www.investopedia.com/terms/d/demand-curve.asp. Accessed: 2. October 2017.
Investopedia. Supply curve. URL: http://www.investopedia.com/terms/s/supply-curve.asp. Accessed: 2. October 2017.
Paleofuture. We've Been Incorrectly Predicting Peak Oil for Over a Century. URL: https://paleofuture.gizmodo.com/weve-been-incorrectly-predicting-peak-oil-for-over-a-ce-1668986354 . Accessed: 2. October 2017.
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