Oil Demand as a Reason of Its Price Increase

Paper Info
Page count 3
Word count 893
Read time 4 min
Subject Economics
Type Essay
Language 🇺🇸 US

Oil Price will go up

Energy is the most precious natural resource that changes the balance of an economy, the modern world would turn into a world of junk without energy. Among all available energy sources, oil is the most demanded energy carrier, and this high oil demand is the reason for the oil price hike throughout the world. As per the law of supply and demand of basic economics, the price of a certain product depends on the supply and demand of that product, oil is not excluded from the law- that means oil price is determined by the market supply and demand.

It would be my suggestion for those investors, who are thinking of investing in the oil market or already have invested in the oil industry or have purchased stocks of companies from the oil industry, that they are going to receive a positive ROI from their investment in the oil industry because the economic indicators are suggesting an upward bias in the oil price. In their article, Baumeister and Kilian (2016) have identified three major reasons for oil price fluctuation and those reasons are- production policy of oil-producing nations, changes in the global business cycle, and changes in demand for oil. Current market conditions and different strategic actions taken by different authorities are signifying that all three major reasons for price fluctuations are being adjusted for initiating a positive movement in the oil price throughout the world.

Kose, Otrok, and Prasad (2012) have found that the growth of China, India, and other emerging economies was unaffected by the recession of developed and industrial countries. Their article explains how the global business cycle is changing and emerging economies are notably contributing to global production. The global economy is not just dependent on a few countries rather the global economy is gradually balancing the economic controls. Developing economies are producing a considerable percentage of global GDP, and according to Kose, Otrok, and Prasad (2012), emerging nations are not affected by the economic slowdown. So, the changes in the global business cycle are suggesting that demand for oil in the emerging nations will continue to grow and it should have a significant positive impact on the oil industry.

The current conditions of the oil market show a significant decline in oil production, but there is a steady growth in the demand for oil which implies oil prices should go up. In the last few years, the dramatic increase in supply in the oil market forced the oil price to go down, and it has heavily affected many oil-producing companies and nations. To change the situation big cartels already have decided to cut down the oil supply from the market, and the decision was implemented successfully, as a result of that oil price again started to increase. In an article Vaughan (2017) has reported the oil pricing scenarios- analyzing different situations and reports published by IEA, he reported oil prices will rise even without further investment in capacity. His article is suggesting that IEA (The International Energy Authority) has reported that oil demand has significantly grown in China and India and it will continue to grow. The current market condition is suggesting a positive movement in the oil price in the next few years.

Considering the current low-price market situation, the oil-producing nation should come up with different policies to improve the oil price. Low oil prices should eventually force the US to drop oil production, while the oil demand will still be increasing in the US as well as in many emerging economies. On the other hand, the OPEC countries which were not cutting down the oil production even when the oil price was at the bottom would be forced, by the threat of economic breakdown, to cut down their oil production.

Arezki and Blanchard (2014) have identified in their paper that OPEC’s strategy and geopolitical situation in Libya, Iraq, Ukraine, and Russia will have a significant impact on the oil supply in the industry. The most recent budgets of OPEC countries are signifying a drop in oil production, on the other hand, the oil demand is still increasing around the world. Most recently in an OPEC meeting, Russia has committed to cut down its production to save the oil-producing nations from breaking out. Ji and Guo (2015) have concluded in their article that OPEC’s announcement of production increase hurts the oil price, and an announcement of production cut has a positive impact on the oil price. All the oil-producing nations’ strategic policies are suggesting there would be a production cut and it will be increasing the price of oil in the coming years.

Analyzing all identified reasons, Baumeister and Kilian (2016), of oil price fluctuations it can be concluded that no matter what, demands for oil will be increasing due to the positive changes in the global business cycle, derived oil demand will be increasing around the world, also the policies of the oil-producing nation are suggesting a positive change in the oil industry. All of these mentioned strategic actions of different oil supplying groups can be considered as a combined effort for improving the oil price to make the industry profitable. So, there is a strong probability that the oil price will go up and investors in the oil industry can expect to have a positive return on their investment.

References

Arezki, R., & Blanchard, O. (2014). Seven questions about the recent oil price slump. IMF direct-The IMF Blog. Web.

Baumeister, C., & Kilian, L. (2016). Forty years of oil price fluctuations: Why the price of oil may still surprise us. The Journal of Economic Perspectives, 30(1), 139-160. Web.

Ji, Q., & Guo, J. F. (2015). Oil price volatility and oil-related events: An Internet concern study perspective. Applied Energy, 137, 256-264. Web.

Kose, M. A., Otrok, C., & Prasad, E. (2012). Global business cycles: convergence or decoupling? International Economic Review, 53(2), 511-538. Web.

Vaughan, A. (2017). Oil price will soar without investment in capacity, says watchdog. Web.

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EduRaven. (2021, November 1). Oil Demand as a Reason of Its Price Increase. https://eduraven.com/oil-demand-as-a-reason-of-its-price-increase/

Work Cited

"Oil Demand as a Reason of Its Price Increase." EduRaven, 1 Nov. 2021, eduraven.com/oil-demand-as-a-reason-of-its-price-increase/.

References

EduRaven. (2021) 'Oil Demand as a Reason of Its Price Increase'. 1 November.

References

EduRaven. 2021. "Oil Demand as a Reason of Its Price Increase." November 1, 2021. https://eduraven.com/oil-demand-as-a-reason-of-its-price-increase/.

1. EduRaven. "Oil Demand as a Reason of Its Price Increase." November 1, 2021. https://eduraven.com/oil-demand-as-a-reason-of-its-price-increase/.


Bibliography


EduRaven. "Oil Demand as a Reason of Its Price Increase." November 1, 2021. https://eduraven.com/oil-demand-as-a-reason-of-its-price-increase/.

References

EduRaven. 2021. "Oil Demand as a Reason of Its Price Increase." November 1, 2021. https://eduraven.com/oil-demand-as-a-reason-of-its-price-increase/.

1. EduRaven. "Oil Demand as a Reason of Its Price Increase." November 1, 2021. https://eduraven.com/oil-demand-as-a-reason-of-its-price-increase/.


Bibliography


EduRaven. "Oil Demand as a Reason of Its Price Increase." November 1, 2021. https://eduraven.com/oil-demand-as-a-reason-of-its-price-increase/.