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Running head: PRACTICAL APPLICATION Practical Application for Supply and Demand


James Patrick McCracken


ECO 87501 Managerial Economics


Dr. Mike Ewald


California Southern University




The main topic of this week's reading is the simple concept of supply and demand as it applies to


global oil prices in the world marketplace, which have experienced many twists and turns in the


past year because of so many external factors. World events have transpired in such dramatic


ways that most economists view or have interpreted that the laws of supply and demand for oil


have not changed, but the influences on the markets have had a deep impact. What the world has


experienced are events that have enhanced troubled economies while drawing attention to other


countries who are not impacted by the lowering of oil prices. Contributing factors for those


troubled countries are armed conflicts that have lead to divesting government sanctions,


expanded oil exploration, devaluation of some foreign currency or manipulation of currency


value. The average consumer that experiences the low price for gas does not see or feel the


impact, however, the troubled economies are not troubled because of supply and demand issues


it is that governments that have made some bad choices. Oil is the main commodity that


determines the relative cost of other good and services. Because transportation is done through


and over long distance trucking companies, the fact that oil remains low the cost for food has not


seen major increase. Ofcourse other factors can impact cost of food, such as weather or


unavailablity of water. In today?s econimy oil and the price of oil is a major contributing factor to


every other business sector. PRACTICAL APPLICATION FOR SUPPLY AND DEMAND 3 Practical Application for Supply and Demand


According to oil market history at the end of the summer of 2014 world economies began


to realize that there was not as much demand out there as they thought. Suddenly, the world is


flush with supplies, and there aren?t enough buyers out there to gobble it all up.


The rapid descent of crude oil prices since last summer has impacted forecasts for both demand


and supply in 2015. However, it is at times of rapid market change that forecasting becomes


most difficult. If history is any guide, current forecasts are more likely than others to be subject


to major revision as the year progresses? (McCracken, 2015). The International Energy Agency said


that weakening demand for oil worldwide is nothing short of remarkable. ?The main international


benchmark, Brent crude, fell about 3 percent to about $61.80 per barrel, a five-year low? (Reed & Jolly,


2014). What is even more remarkable is the blunt language used by the IEA, which usually are low key as they provide global stats as they maintain a strong bureaucratic stance. Fluid ?oil


prices could not have come at a worse time for the Russian economy, already reeling from


capital flight, sanctions, and the onset of a full blown recession? (IEA, 2015).


Russia is so overwhelmingly dependent on oil and natural gas to fuel its economy that an


extended period of sub-$100 per barrel Brent prices spells trouble for the Russian economy. For


every $1 decline in the price of a barrel of oil, Russia loses out on $1.4 billion in annual revenue.


?The decline of oil prices together with restriction of an access of Russian banks to foreign


borrowings leads to reduction of currency funds. According to our estimate, the flow of funds


decreases by about $200 billion in annual terms? (Graeber, 2015). Perhaps the oil producer in


most trouble, and oddly enough, one of the least in the news, is Venezuela. Venezuela is one of


the world's largest oil exporters, but thanks to economic mismanagement it was already finding it


difficult to pay its way even before the oil price started falling. ?Inflation is running at about 60% PRACTICAL APPLICATION FOR SUPPLY AND DEMAND 4 and the economy is teetering on the brink of recession. The need for spending cuts is clear, but


the government faces difficult choices? (Bowler, 2015).


?Last OPEC meeting sharply divided nations as Venezuela and a handful of other oil


producing countries failed in their bid to persuade other members to bring down the oil


production ceiling. Analysts saw the decision to keep production levels stable as a shrewd move


on the part of Saudi Arabia, Kuwait and other nations able to withstand slipping prices while


looking for a competitive edge against the booming U.S. shale gas industry. But for other oil


producers, including Venezuela, Nigeria, Russia and Iran, the move signals further economic


turmoil? (Lee, 2014). The violent protests that rocked the country in February have subsided, but


they could roar back in the coming months if the problems do not recede. The Venezuelan


government tried to reassure the markets, but its problems could be about to get worse, not


better, now that oil prices are dropping. There is a decent chance that this whole thing blows up


in the coming months. It is not all doom and gloom for major oil producers, as crude has the


habit of fluctuating wildly. Just as prices dropped because of weak demand and larger supplies,


the markets could quickly tighten once again. In fact, over the long-term, demand will only


continue to rise. Oil producers just need to find a way to ride out the near-term. But, that is easier


said than done, and if oil prices remain persistently low, some of these countries may not be able


to weather the storm. PRACTICAL APPLICATION FOR SUPPLY AND DEMAND 5 References


Bowler, T. (2015). Falling oil prices: who are the winners and losers? BBC News. Retrieved from Lee, B. (2014). Venezuela?s currency, bonds plummet as government grapples with oil prices.


International Business Times. Retrieved from McCracken, R. (2015). Oil demand, prices and decelerating us supply. The Barrel. Retrieved from Graeber, D. (2015). Russia?s central bank frets over oil price and sanctions pressure. United Press


International. Retrieved from Reed, S. & Jolly, D. (2014). Energy agency cuts oil demand forecast, adding to pressure on


prices. New York Times. Retrieved from


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