ASSIGNMENT

Assignment



Question 1

Oil is one of the most significant sources of fuel (petrol) and any change in its prices could significantly affect industries, sectors and individuals. Crude Oil has gone through a series of price changes from 1960s. The price per liter of Crude Oil rose from $0.5 in January 2007 to $0.92 in July 2008. The year 2008 is considered as the worst year as Crude oil prices increased significantly. In May 2009, the prices of crude oil again fell to $0.55. The increase in oil prices is dependent upon the increase in the demand of oil against its supply. When the demand of oil increases, the prices increase (Ardy, 2009). The demand of oil could be increased due to a change in price of substitutes for oil, the price of complementary products, incomes, technology and population.

The drastic change in the oil prices was marked with the shocks and economic crises that were prevalent in the late 2007 and in 2008. The price of the oil is correlated with that of economic output which led to the lower income due to lower consumption of oil and related products in the international market. This extended till the end of 2008 and somewhat continued in 2009 while the recovery period began in 2010 while speculation also took place. Due to the world economic recession, initially the impact was uneven but then it prevailed throughout the world economies (Mehra 2005, 53-7).

From the year 2003-2007, the oil demand remained static or saw a decline in USA, Canada, EU and Japan account for 45% of world demand. After the oil shock of 1985, oil consumption kept on increasing by 1.6%. Moreover, the price elasticity of oil is low, and the alternative fuel sources are not very efficient

Shocks After 2007

After the year 2005, the oil production has remained stagnant, when the oil consumption has been increasing. Turmoil in Nigeria, strife in Iraq and hurricanes in Mexico has all led to a stagnant supply of oil. These factors have led to a significant supply demand gap causing a rise in oil prices. Moreover, Saudi Arabia is the significant oil producer of the world. Oil supply from Saudi Arabia has been witnessing swings since the 2000s creating problems for world economies. The increasing demand-supply gap is evident from the fact that oil consumption only in China is increasing by 7% annually. In 2007, oil consumption in China was 870,000 per barrel. World GDP has been growing around 8% in recent pasts, which has led to increase in oil consumption and its prices (Roubini 2004, 1-12).

After July 2008, the oil prices also saw a decline due to a reduction in oil consumption by developed countries. This decline in consumption was attributed to recession when oil demand decreased leading to a decline in oil prices. The drastic change in the oil prices was marked with the shocks and economic crises that were prevalent in the late 2007 and in 2008. The price of the oil is correlated with that ...