Supply, Demand, Price

Essay by su2daveCollege, UndergraduateA+, August 2006

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According to our reading material, economics is defined as the study of how human beings coordinate their wants and desires, given the decision-mechanisms, social customs, and political realities of the society. (Colander, 2004). Simply stated, when the demand is high and the supply is low, then the price is high. The recent increase in oil prices is a perfect example of supply and demand. Supply and demand runs economics and the petroleum industry. This paper will analyze an article based on the 2005 oil outlook and discuss why changes have occurred in the supply, demand, and price in oil.

Demand

Demand is the amount of a good or service that economic agents are willing and able to buy at alternative prices, other things remaining the same. According to Matthew R. Simmons, Chairman and CEO, Simmons & Company, International, Houston (2004), the biggest oil story in 2004 was the soaring oil demand.

Simmons stated that there was a widespread belief ten years ago that oil demand was unlikely to ever resume any significant long-term growth. The biggest contributor to this belief was that global oil demand had stayed in between 66 to 68 million barrels per day for the prior seven years. The 1-year that global oil demand crossed 70 million barrels per day was 1995. Over the next nine years, global oil demand grew from 70.0 to 82.4 million barrels per day. It is believed by many that the growing demand from China was a key role in the demand for oil. However, according to Simmons (2004), the growth in oil use came from everywhere. The following chart illustrates the global oil demand, in MMbbl (million barrels) from 1995 through 2004.

A few of the reasons oil demand in 2004 was strong include a solid economic growth in the...