Oil prices and its effect on the global market Term Paper

Oil prices and its effect on the global market - Term Paper Example The developing countries are heavily dependent on oil exporting countries for their import of petroleum products. So if there is a rise in oil prices only the oil exporting countries benefit while bringing a destructive effect on the developing nations. What really affects the oil prices is the demand and supply of oil which we are going to look into detail later. The global market saw a recent surge in oil prices since the last two years with the most recent rate of today being $124 per barrel (forex.com). It was predicted that the production of crude oil must be increased by the oil producing countries to bring the prices down. The Arab oil exporters held a meeting in early 2011 in Cairo to discuss this issue but refused to increase oil production as they believe that the supply is sufficient in the market. The oil prices rose to $ 94.74 per barrel this year since October 2008 when oil prices were record breaking high. The forecasted trend is an increase in oil prices in the coming weeks touching up to $ 100 a barrel. After the financial crisis of 2008, OPEC or Oil Producing and Exporting Countries decreased their level of output in order to deliberately create a shortage so that prices go up. In 2010, the demand for oil increased and is expected to increase more in 2011. OPEC must release some of their stock and raise the supply of oil or else the prices can rise to unprecedented level of $ 150 per barrel. These unfavorable conditions can lead the world into another crisis. Body: The trading of oil is one of the most significant trading done in the world. Crude oil is a primary ingredient in many energy manufacturing and services industries. I certainly believe that oil should not be treated on the commodity exchange because it can have significant impact on the world economy. So if there is a fluctuation in oil prices it affects oil producers and exporters both. The market price for any product is determined by the demand and supply of it in the market. The desire to want something is defined as demand or when you realize that you want a product, can afford it, and have made a definite plan to buy it. The law of demand means that other things remaining the same, the higher the price of the good, the smaller is the quantity demanded The higher price of any product will reduce the quantity demanded for two reasons. A notable economist, Kotler has found that one of the reason is the substitution effect, that is, when the price of a product rises, other things remaining the same, its opportunity cost rises. Although each good is unique but has its substitutes, for example the substitute of oil in an energy producing plant could be water or solar energy to produce electricity. As the opportunity cost of a product rises, people have a tendency to buy less of that and more of its substitute. Another reason for change in quantity demanded is the income effect. When a price changes and all other influences on buying plans remaining the same, t he price rises relative to people’s incomes. So faces with a higher price and an unchanged income, people cannot afford all the things they previously bought. Subsequently, the demanded quantity reduces. Price has an inverse relationship with demand (Kotler, 2006). A supply is more than just having the resources and the technology to produce something but the