OIL INDUSTRY DEMAND AND SUPPLY

Oil industry demand and supply



Oil industry demand and supply

Introduction

Since the 1970s of the twentieth century, the international crude oil price has been going up and down, showing daily volatile oscillation as well as several clear-cut rising and falling segments. Figure 1 shows the crude oil price fluctuation from January 1974 to March 2010 and it shows that the price has been raising quickly since 2002. The highest nominal price jumped to 127.77 US dollars/barrel (monthly average) in July 2008, which was an increase of nearly 12 times compared to 9.59 US dollars per barrel in January 1974. Meanwhile, the real price rose from 12.27 US dollars per barrel in February 1999 to 113.47 US dollars in July 2008, an increase of nearly nine times. Huge fluctuation in crude oil price has far-reaching implications on the world economy; many studies have been done in the literature since 1970s (Carruth, 1998, 621).

Analysis of factors influencing crude oil price fluctuation

Previous studies in the literature show that the main influencing factors include supply and demand imbalance, speculation and hedging activities, geopolitics and the value fluctuation of the US dollar, etc. Owing to the possibilities of variable quantification and data availability, the relevant studies of economics are mainly carried out from the perspective of generalized supply and demand analysis (John, 2003, 66).

Our research in this paper will also follow the similar assumption that crude oil prices are influenced by four categories of structural shocks, likely, the general supply and demand factors, geopolitics and expectation effects - those shocks will be decomposed further into two types of supply shocks and two kinds of demand shocks (Verleger, 2009, 66).

Exogenous oil supply shocks driven by geopolitical events in OPEC countries

According to the 2009 British petroleum statistic report, the magnitude of the proven oil reserve of the Middle East was among 754.1 billion barrels at the end of 2008 - about 59.9 percent of the proven world crude oil reserve. Owing to their lion's share of crude oil reserve, the geopolitical issues and profound events of the Middle East exerted great influence on the fluctuation of the real oil price in the history.

As we know, the Middle East has been the most sensitive area in the world in terms of geopolitics, regional military profoundness and energy security since the Second World War. There have been a series of political unrest, military conflicts even several large-scale regional wars (Table I) in the Middle East area so far, which had great influence on the world crude oil supply. For example, the Islamic revolution broke out in 1978 led to the deductions of the Iran's oil production and export due to the Iranian workers' strike - the crude oil production has declined from more than six million barrels per day in September to 2.4 million barrels per day in December.

Demand shocks on real price of crude oil

We will mainly analyze two types of demand shocks, that is, the general demand shock and the oil market specific ...