Skip to main content

Demand and supply - data response


Interaction of demand and supply

Oil Prices

"Experts see no relief from high oil prices. Even OPEC's promise to pump more crude has failed to cool markets" reads a headline in The International Herald Tribune -The Global Edition of the New York Times (7 April 2011. Matthew Saltmarsh). The article goes on to report on the oil conference in Paris held the previous day. The Chief Executive of the French oil company, Total, Christophe de Margerie, stated that whilst he would be happy for oil prices to go down to $80 he could not see it happening: "Demand plus costs are increasing - tell me how you could see a reduction in oil prices," he said.

He went on to say that oil prices were being buoyed (kept high) by the concerns of the political stability in the Middle East and the worries about the future of nuclear power as a result of the effects of the earthquake and tsunami in Japan last month. "Short term, there's enough capacity available," he said. "But for the long term the best way we can avoid rising prices is investment in projects, non-conventional energy and reducing consumption in all countries."

Question 1

Define the terms:

  1. demand
  2. market

Question 2

With the aid of a suitable diagram, explain how increased demand for oil and increased costs of production lead to higher oil prices.

Question 3

Using your knowledge of economics and of the real world, explain how uncertainty in a market can lead to buyers stockpiling reserves of a good such as oil regardless of high prices.

Question 4

Evaluate the likely success of the imposition of policies by a government to promote non-conventional energy, such as bio-fuels, and reduction of oil consumption.