Microeconomics Case Study

Galloping Oil Prices: Supply-Demand Dynamics

OR

Abstract:
Crude oil is an important global commodity. Its use is indispensable in the production and distribution of almost all products used in day-to-day life. Hence drastic fluctuations in the price of oil can have a cascading effect on the price of every other product or service. Recently the price of crude oil crossed the $100 per barrel mark, throwing the international economy out of gear. Many countries are struggling under the pressure of double digit inflation and economic recession - a situation referred to as 'stagflation' in economics. The price of oil galloped to alarming levels despite the availability of adequate supply in the market, questioning the fundamentals of the laws of demand and supply. The case study gives an insight into historical movements in the price of oil, its impact on the global economy, the emergence of OPEC as the most influential organisation controlling the oil market and its loss of grip over the price of crude oil. The dynamics of demand and supply in influencing the price of oil has been put to the test and the role of non-fundamental factors in causing violent fluctuations in the price of oil has been evaluated.

Pedagogical Objectives:

• To understand the importance of oil.
• To identify the factors that influence the price of crude oil.
• To examine the role of demand and supply in determining the price of oil.
• To evaluate the impact of non-fundamental elements on the price of oil.

Keywords :  Crude oil, Demand, Supply, Speculation, Futures market, Oil contracts, Geo-political, Value of dollar, Perceived demand, Scarcity of oil, Peak oil, Arab embargo, Oil conservation, Alternative resources