It is Always Because Supply and Demand

The global economic crisis has become the center of analysis for many economists nowadays. It is quite obvious because the crisis has caused severe damage and destruction to many countries in the world. Sam Zell, a real estate mogul from US, said that “it is the perfect storm”. Among many areas that had been affected by the crisis, one that interests me the most is the declining of oil price.

Recently, there was a debate of what caused the oil price hike. Some said that it is because a speculative action, others said that it is because supply and demand. It proved to be the oil price hike is caused by the shortage of supply or the excess of demand. Look at the graph below.

Source: Energy Information Administration

The oil price movement is always aligning with the world’s economic condition. If the world economic grows, the demand of oil increased. The increasing demand for oil would raise the oil price, because countries will pay at any rate to run their machines. At the other hand, the oil production cannot adjust immediately to meet the increasing demand. This is because it needs a lot of effort (money and time) to expand an oil refinery. Thus, the oil supply becomes sensitive to any types of issues. Any news related to the disturbance of oil supply would drag the oil price up.

Speculative action cannot be done without a sound supply and demand condition. The oil traded in the US market is priced about US$ 130/barrel in June, it dropped to about US$ 48/barrel in November. The declining of the oil price is obviously because the world economic crisis that effected many countries economic growth. Slower or minus economic growth would then drop the demand for oil. In this case, many oil producers would sell at any rate. Because if it’s not sold as quickly as possible, the oil stock would add the producers cost. For example the costs for storages, warehouse, etc. Therefore if it comes to oil price, it is always because supply and demand.