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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

 

November 15, 2015 1 PRACTICAL APPLICATION FOR SUPPLY AND DEMAND 2 Abstract

 

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

 

http://www.bbc.com/news/business-29643612 Lee, B. (2014). Venezuela?s currency, bonds plummet as government grapples with oil prices.

 

International Business Times. Retrieved from http://www.ibtimes.com/venezuelascurrency-bonds-plummet-government-grapples-oil-prices-1731469 McCracken, R. (2015). Oil demand, prices and decelerating us supply. The Barrel. Retrieved from

 

http://blogs.platts.com/2015/02/27/oil-demand-prices-supply-us/ Graeber, D. (2015). Russia?s central bank frets over oil price and sanctions pressure. United Press

 

International. Retrieved from http://www.upi.com/Business_News/EnergyIndustry/2015/11/13/Russias-central-bank-frets-over-oil-price-and-sanctionspressure/4311447422758/?spt=slh&or=1 Reed, S. & Jolly, D. (2014). Energy agency cuts oil demand forecast, adding to pressure on

 

prices. New York Times. Retrieved from

 

http://www.nytimes.com/2014/12/13/business/international-energy-agency-cuts-oildemand-forecast.html?_r=0

 


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