Name: Seowon Jung
Instructor: Barbara Ross
Source: gulfnews.com 11/16/2008
The oil price is going down. The Dow Jones Industrial Average was 337.94 points on 11/14/2008 and the Chicago Board of Options Exchange is seeing options to sell oil at $30.00 a barrel now. The oil buyer has not been interested in buying the oil for almost 2 years because of too low price to make profits. The Brent is selling $53.85 as priced 60 percent off. The largest oil consumer in the world, U.S, has reduced their oil expenditure about two million barrels per day.
First of all, the U.S, the largest oil consumer, has reduced oil expenditure due to the economic slump is the most important point. The oil doesnt have any substitutions and complements. Indeed, we can use the solar power, electricity for the hybrid car and any other nature resources for what we need but they are not popularized yet. Even though the oil producer will keep producing it in order not to make more loss by fixed cost but consumers demand wont be changed. As a result, the oil price wont be increased. Therefore, the demand curve will be moved to the left and getting inelastic; and the supply curve wont be changed before the oil market will be buoyant. The oil market is kind of oligopoly market because only a couple of countries can produce the oil. Their association, OPEC, decides the output and even the price. Therefore, decreasing demand of an oligopolistic good like the oil is an exceptional case. Besides, it is an evidence to prove that this blow of an economic slump is serious problem.
The price between willing to sell and willing to buy is not matched. Consumers are reducing or not buying the oil; and the oil trader is not attracted by the oil. As a result the oil price has been decreased and mediated by invisible hand. After the economic slump at this present, if we could overcome from this economic sump, the demand curve will be moved to the right and elastic. However, the supply curve will be inelastic and the oil output wont be changed because the oil output, supply and price are decided by OPEC. Besides, the demand for oil will be the price inelastic in the short run but elastic in the long run.