Oil Prices Essay Example | Topics and Well Written Essays - 1250 words

Oil Prices - Essay Example The oil market has highly inelastic demand and supply especially in the short run mainly because there are a few if any substitutes for it. Scientists have attempted tirelessly to create solar and CNG run cars and there has been an attempt to harness nuclear power at all levels of the industrial use. Oil supply is also inelastic because of the cost of the refining and infrastructure costs incurred by the crude oil suppliers to make the oil marketable. Also associated are the costs of maintaining such infrastructure because the cost of infrastructure remains constant regardless of any output. For example when in 1973 the OPEC cartel announced a US-Israel Boycott there was a reduced supply in the overall oil output therefore for any given price level, there would be lesser oil supplied. Natural causes like earth quakes or war situations also have a significant effect on oil supply. An example is the recent disaster of the Hurricane Katrina which affected production in the Gulf of Mexico. More so the increasing industrial demand for oil in the third world countries is also a factor in the rising oil prices. In the following diagram at any given level of price, more oil is demanded and the price increases. However with regard to oil prices in the long term there are other factors at play. The long term demand and supply of oil are very much elastic. Long term demand is likely to change if the oil shortage is constant. A short term disaster may change consumer behaviour temporarily but in the long term if the supply remains short constantly the following might happen; People might start adopting to the shortage by using more fuel efficient cars, using CNG,solar power or even nuclear power. At the industrial level nuclear power or coal power can replace oil powered generators.These are slow changes but have permanent long term effects on the demand of oil. There might be increased oil exploration in areas where previously it was too difficult to start wells. This may be because a supplier is restricting the oil supply. The effect of finding new oil fields will be to break already established cartels or oligopolies. There is not just one answer to the reasons behind the rising real oil prices.This has become an issue much influenced by war and politics.The demand and supply factors are very much influential in the short term but in the long term the consumption trends and investment are greater reasons for the shifts in the demand and supp