Oil Price and Demand Changes

Question: Discuss about the Oil Price and Demand Changes. Answer: Introduction There exist a relationship between the change in price for goods and the change in demand. This relationship is the main concern to be considered in this paper. Oil prices has fluctuated and had fallen to very low levels due to the increased oil production in the US (shale oil) from 2008. Furthermore the biggest oil producers have not been willing to welcome a production cut, they have been doing this as a pricing strategy to kick some players out of the market. It can therefore be concluded that the oil market is an oligopoly market where players have control for both prices and quantities. The price has gone down and the demand for oil increased; this relationship is referred to as the price elasticity of demand (PED). In 2015, the decrease in oil price resulted in a small increment in the demand for oil. This means that the demand for oil is not much responsive to price changes. I.e. it is inelastic to price changes as shown in the graph below. Since the elasticity of demand is less than one, the demand is inelastic meaning that demand has changed slightly after a big change in price (McEachern, 2016). I agree on the opinion on PED expressed in source 1. The reason I base my argument on is that in fact even if the demand for oil did not go up significantly, at least the falling prices stimulated some demand increment. At lower prices, more oil was consumed compared to the initial consumption when the prices were high. My advice to an oil producer would be to increase prices so as to gain more revenue since there will be an insignificant reduction in demand (Johnston, 2015). This is explained by the inelasticity of demand for oil. Below is graphs on an oligopoly market. Hermawan (2014) argued that price cuts will result in revenue fall since other firms will follow. The oil price has been low and remained low for a long time since OPEC did not embrace the decision to cut production so as to enable producing firms to raise the prices. The announcement of the decision to cut production in 3rd December 2016 resulted in the oil price going up for the first time in some few years. This was meant as a strategy to revise the price upward. Demand laws hold that when supply is high, prices falls. On the other hand, when supply is low, prices rise. References Hermawan, J. (2014). Joko Hermawan's Blog. Jokohermawan14.blogspot.co.ke. Retrieved 21 January 2017, from https://jokohermawan14.blogspot.co.ke/ Johnston, M. (2015). Oligopolies | econfix. Econfix.wordpress.com. Retrieved 21 January 2017, from https://econfix.wordpress.com/tag/oligopolies/ McEachern, W. (2016). Economics: A Contemporary economics (1st Ed.). Mason, Ohio: South-Western Cengage Learning. Riley, G. (2012). Unit 1 Micro: Revision on Elasticity of Demand (for Rice) | tutor2u Economics. tutor2u. Retrieved 21 January 2017, from https://www.tutor2u.net/economics/blog/unit-1-micro-revision-on-elasticity-of-demand-for-rice.