In this modern era of globalization, oil is playing an extremely important role in today’s world. It is one of the major sources of energy. There are a lot of daily activities which we cannot carry on if there is no exist of oil, a very good example like mobile transportation, buses, cars, airplanes. Without oil, we cannot start up our engine and travel wherever we want, this bring a major convenient to humankind. Cooking, something which related to oil as well. We need gas to cook our daily meal, gas and oil are extracted from the source.
Undoubtedly the demand of oil is increasing time by time although the current price is very high. The basic understanding for demand is something that you want and something which you can afford. Besides that, you must have made a definite plan to buy it. There are six main factors which will affect the demand of good directly. The price of related goods, expected future prices, income, expected future income and credit, population and preferences. There are many reasons which cause the growth of the demand of oil. The demand of oil is inelastic because everyone needs oil in their daily life. With the expansion and industrialization of the countries, their oil consumption grows with the economy. At this instant, both China and India are the main nation when it comes to growing economies. Other countries that are under developing are changing their oil habits as well. Moreover, there are reasons which brought up the price of oil. Oil is extracted from fossils which stay under crest of the earth thousands years ago. Every day, people are consuming in a large quantity and as time flies it becomes incredibly costly. Furthermore, population is getting higher compare to the past, this will affect the price of oil as well. There are few factors which will affect the demand curve. The law of demand states that the lower the price of the goods, the higher the quantity demanded and same to the higher the price of the goods, the lower the quantity demanded.
Substitution effect is when the relative price of a certain goods or services increase, people will look for the substitutes for it, therefore the quantity demanded of the goods or services decrease. A substitute is a good that can be replace of another good. There are few alternatives to replace the current oil. Biodiesel, propane, hydrogen, battery power, and ethanol, those are the substitution goods for oil. Biodiesel is the most common substitution goods for oil so far. Biodiesel engines run on greases and it consume every day. Due to the environmental issue, people change diesel to biodiesel. Although biodiesel still produces carbon monoxide like gasoline, but just a lower level of it. Furthermore, propane is one of the substitutions of oil as well. It is one of the most used gases in United State of America. 200,000 propane vehicles are being driven on the road until today. Propane is not the best alternative because it is produced as a derivative of gas and petroleum refining. Next is hydrogen, it can easily produced by nuclear and it is environment friendly because water is the only thing it exhaust. Believe that this technology will be widely use in further future. Not only that, battery power is getting common as it can combine with any gasoline vehicles and turn into a hybrid car. The major advantage of a hybrid car is that they can save a lot of energy. The battery will recharge itself whenever the driver uses the brake system. As everyone know that ethanol is made up of sugar. But, the main problem of using the alternative is the transportation problem. The prices of this alternative are reasonable and acceptable. Thus, buyers will have more variety to choose between the actual good and the related good.
The supply of oil cannot last forever. The basic understanding for supply is when a firm supplies a good or service, the firm has the resources and technology to produce it. They can profit from producing it an has made a definite plan to produce and sell it. the current largest supplier of oil is Saudi Arabia. They are not willing to share with the world exactly how much they left and how long more they can actually supply. Other countries they are almost completely finish with their oil like United State of America and other develops countries. In 2004, Mexico announced that the producing speed of oil of their largest oil field and the second fastest producing field, Cantarell Field started to decline. In the year of 2002, they produced almost 2.1 million barrels per day but as the time pass in year 2008 they can only produced 1million barrels per day (Trading today 2012). As you can see the production of oil is decreasing dramatically. Prices of oil will increase in the future as well. In the law of supply, the higher the price of good, the greater the quantity supplied and the lower the price of a good, the smaller is the quantity supplied. A producer is willing to supply a good only if they can at least cover the marginal cost of production.
In conclusion, a market is arrangement that enables buyers and sellers to get information and do business with each other. A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price.