World demand for oil
...ers in the oil market believe there will be a shortage of oil supplies, they may raise prices before a shortage occurs. Other factors influencing the price of crude oil include accidents, bad weather (increasing demand, or halting transport of oil from producers), labour disputes (strikes) and other disruptions to production including war or natural disasters.”(ref 1). There are two basic reasons for low oil prices in the short term - too much supply or too little demand. Thus low oil prices are due to a supply - demand imbalance. In the current situation demand for oil has decreased, thus D1 has shifted inwards to D2 (ref figure on Page 2) and thus the price of oil has dropped to P2 from P1 as the equilibrium point has shifted from A to B. The OPEC strategy intends to shift S1 to S2 thus shifting the equilibrium point from B to C thus increasing the price of oil from P2 to P3. As the articles show, OPEC is also trying to reach agreements with other oil exporters (outside OPEC) to reduce production levels. This is because the results of all OPEC efforts to reduce Production (i.e., increase prices) will be ineffective or neutralized if the countries outside OPEC maintain or increase production levels. An important underlying principle in the OPEC strategy is that the demand for oil is inelastic to price increases. Oil is necessary for sustained economic well being as it is needed to power industry and also for high yield agricultural production. A large part of industrial production costs are energy costs such as fuel costs and gasoline costs. The cost of fuel is dependent on the price of crude oil and other factors such as taxation. Although countries account for oil price fluctuation at the drawing up of the budgets, increases in prices of oil get factored into product prices with the consumer eventually paying more for products and fuel. ...