Example Of Equilibration Research Paper
One of the examples of the change in free market of demand and supply concerns the equilibrium at oil market. Oil price floated with small fluctuations around the level of $20 a barrel for a very long period of time (1985 – 1999) and at that time there were no signs of its extreme growth in 2000s. In July 2008 oil prices reached more than $147 a barrel, having made a 13-fold rise from their minimum of $11 / barrel in late 1998. Some analysts and industry experts then predicted achievement level of $200 or even $300 per barrel in 2008, but oil prices peaked July 14 and began a sharp decline, proving beyond doubt that the rapid run-up and subsequent decline had little to do with what could be considered “fundamental” factors (Mohantya et al, 2011).
According to the law of demand ceteris paribus the amount of demand for the goods is higher, the lower the price of this product, and vice versa, the higher the price, the lower the value of the demand for goods. The law of supply is that, other things being equal, the amount offered by the seller of goods is higher, the higher the price of this product, and vice versa, the lower the price, the lower the value of its offer (Mankiw, 2014).
If to remember the recent past, when, after the jump in prices in the late 1970s, which peaked in 1982 in 80-es the global oil demand was in a state of stagnation and even started to decline, led by the largest oil consumer – the United States. This leads to the change in quantity demanded and the curve remains at the same position.
Then, to contain rising oil prices, the US made an unprecedented move. High oil prices in the 1970s and the new standards for emissions into the air pushed the optimization of the production of fuels and their use. Gradually, the United States reduced the burning of fuel oil for power generation, part of which was also replaced by nuclear, energy, natural gas and coal mined in the United States and Canada. The total oil demand in North America declined by 1983 to 890 million tons up to 690 million tons or 20% compared to 1977 year, and did not exceed the level of 1978 until 2002 (25 years old). This has also been achieved thanks to the optimization of consumption in road transport. This is despite the fact of steady growth of cars on American roads, traveled distance and the number of transported cargo. Thus, the leader in the consumption of oil and oil products affected the prices using market methods. It is worth mentioning that speculative component had not had such a significant impact on the price compared to the present time (Mohantya et al, 2011).
After the crisis of 2008-2009 a new approach to understanding the pricing of oil in the world market began to gain popularity among economists. Supply and demand of oil ceased to play a significant role in price formation. The speculative component became the first. The price of oil has become less and less dependent on the actual supply and demand of “wet” barrels, although this does not take into account the proponents of market-based approach. A new factor has been gradually play an important role in determining the price – the amounts of financial flows flowing into oil futures at NYMEX from pension and other investment funds, the tacit approval of US regulators. Daily trading volume of ‘paper oil” on the NYMEX overshadows physical volumes of global consumption of oil. According to various estimates, they exceed the volume of trade of “paper oil” by 10-100 times. It shifts the demand curve to the right as non-price factor.
In 2000 the Commodity Futures Modernization Act was adopted, thus reducing to a minimum the regulatory oversight of operations on too risky investment companies. Commodity Futures Modernization Act or “Enron Loophole” has enabled many energy companies to get out of the scope of government regulation and control of electronic trading in energy futures, which gave rise to the strongest speculation and formation of so-called “bubbles” (Chapter 10: Regulation of Trading and Securities Markets). However, a loophole remained. Today, oil has become the most speculative product in the world. Now supply and demand only marginally affects the price, while the demand for oil futures actually determines the demand for oil that is reflected in its price.
Thus, the reduction in oil prices was due to the unusually wide supply and demand slowdown, particularly in China and Europe. The United States and to a lesser extent Canada also played a prominent role in the dramatic change in the situation in the oil market. Since 2005, the production volume of black gold in the US doubled and reached the level of 9 million barrels per day. And this is not the limit. In addition, a real revolution of shale gas production has been not the first year the competitor for oil, including in the field of electricity production.
Chapter 10: Regulation of Trading and Securities Markets. Retrieved from https://courses.cit.cornell.edu/jteall/fi10.pdf
Mankiw, N. G. (2014). Principles of Macroeconomics, 7th edition. Boston: Cengage Learning.
Mohantya, S. K., Nandhab, M., Turkistanic, A. Q. and Alaitanic, M. Y. (2011). Oil price movements and stock market returns: Evidence from Gulf Cooperation Council (GCC) countries, Global Finance Journal, 22(1), pp. 42-55.