Topic: EconomicsInflation

Last updated: February 19, 2019

COMMENTARY OVERSHEETEconomics commentary number: 1Title of extract: “Oil Price Drop Triggers a ‘Herd Mentality’ of Selling”Source of extract: The New York TimesDate of extract: 30-04-2015Word count: 737 wordsDate the commentary was written: 07-03-2018Sections of the syllabus to which the commentary relates: Section 2 MicroeconomicsCandidate name: Roshani Tilokani Price Drop Triggers a ‘Herd Mentality’ of SellingHOUSTON -In the recent days, oil market was considered to be boring since because of the price drop which is around $51 to $56 a barrel. And also, the American oil price has an adoration of 9 percentage with the price drop of $50 a barrel. This is because of the reason that the Organization of the Petroleum Exporting Countries came to a conclusion that the oil production to be cut in order to support the market. But after making few analysis made by the energy analysts, it came to a situation that the commodity traders might send oil prices below $45 a barrel and this might be prolonging for the upcoming few years.The Price of West Texas Crude OilDay to day, the commodity traders who would move the markets became highly unsatisfied since because of the changes in the oil price again down to $30 a barrel.

And because of this OPEC agreement, the oil price drop was still higher and the commodity traders became so nervous and terrified. The OPEC members have cut the oil production significantly around two million barrels a day and this affects the global market which is around 96 million barrels a day all around the world. The usual daily oil production in 2016 and 2017 was 8.9 million barrels and 9.2 million barrels accordingly and this year it was expected to be 9.7 million barrels a day.

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COMMENTARY NUMBER 1 To be very practical, without demand, business does not matter anything to us. Demand plays a major role in business in relation with the customers. In Economics point of view, Demand could be described as how much amount of goods and services are bought at different prices during a certain amount of time.

So, demand should always satisfy the consumers needs and desires according to their expectations and experience them. The oil price falls from P1 to P2 leading to an increase in the quantity demanded q1 to q2 which is so called an extension of demand. The demand for a product can also be affected by the five determinants which are explained below.Determinants of DemandThe determinants play a major role and there are totally five determinants and the most significant one would be the price of the goods and services itself. And the second one would be the price of the related products and services or either their substitutes or complementary. The next three determinants would be driven by the incomes of the consumers, their needs and expectations.Demand Equation or FunctionThe equation shown below shows the relationship between the demand and the five determinants of demand and how it works on a day today basis;qD = f (price, income, prices of related goods, tastes, expectations)The above equation states that the quantity demanded of a product could be a function of five factors which are above explained a s the five determinants of demand and they are as follows;Price,Income of the consumer,Price of the related goods,Tastes of the consumer and The expectations of the consumer.The Price PressuresAfter rising the oil price last year, the cost of the crude per barrel had gone down to $43.

And there is a decrease of 60% in the past three years. There seemed to be a fluctuation of the oil price with respect to the geopolitical and economic turmoil. U.S. Production Has SlowedDue to the price drop in oil production, there has been no profit in the US oil companies and as a result of it, many oil companies went into liquidation.

And also because of the forest fire in the oil sands in Canada made several oil companies to slow down or stop altogether. So, as a result of it, there is an inflation in the unemployment for few percentage as well. The liquidation of some oil companies hits the unemployment to some percent.

The Supply-Demand ImbalanceDue to the above mentioned scenarios, the US companies oil production has been decreased while there is an increase in Saudi Arabia and Russian markets which seemed to be pumping at higher levels. But last year, there seemed to have a return in the balance , but not completely since because the demand is weak and it takes a while to resolve it. And the supply-demand imbalance is shown in the below graph.


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