Price Theory : Demand and Supply

Price of Fuel

Fuel has already become a daily need for everyone especially for citizens of a well developed country. We as the fuel consumer watch the price continue to fluctuate throughout the year. Here the question rises, what cause the price of fuel to rise and fall ? 

Cost of Crude Oil

One of the major factor is the cost of crude oil in market. Crude oil is the primary raw material used to produce fuel. Crude oil prices have risen dramatically each year, which is caused by a strong global demand, a limited spare oil production capacity, and a continuing political instability in certain oil producing areas. According to Caltex, the price of crude oil contributes almost half  the price of a gallon of fuel. This means that the price of fuel rises as the cost of crude oil rises. During 2008 to 2009, weak economic conditions around the world lead to a fall in demand, which cause the prices to fall as well. As the economic recovers, demand rises but unrest in the Mideast and North Africa faces the combination of rising in demand and reduce in supply again push the price higher. (Caltex Worldwide, Chevron Corporation, 2012)

Global Demand

Global fuel consumption is expected to grow as the global economy rebounds.The world’s demand for fuel increased rapidly for several years and hit the peak at 86 million barrels per day in 2007. As the global economic weaken in year 2008 and 2009, the consumption had reduced to 85 million barrels per day at it's peak before the recovery in year 2010. The EIA, Energy Information Administration predict the growth to accelerate in the year 2012 hitting 88.8 million barrels per day and nearly 89.7 million barrels per day in 2013 and continue to rise, the total world consumption of marketed energy is expected to increase by 44% in the year 2030 than it was in year 2006. —As the economic rebounds, income level is higher, therefore even if the price of fuel is unchanged, the demand for fuel will be higher. As the demand increase, supply is insufficient. In this case, an increase in the Price occurs to eliminate the shortage by affecting the quantity demanded and quantity supplied until the original equilibrium is established. (American Petroleum Institute, 2012)

Global Supply-and-Demand Problems

The increasing of price for crude oil over the past few years is due to the continuous high demand for fuel from strong economically growing countries in Asia like China, India and other non-OECD countries. This is partly due to the fact that it takes time to develop new pipelines.The limitation of oil refineries resulted a reduction of spare oil production. This cause a shortage of supply when there is an excess in demand of fuel. Unstable political conditions of the Middle East which is the oil producing regions is one main factor of global concern.  (Demand Media, Inc., 2012)

Natural Disasters

In any market situation, supply and demand imbalances can affect prices in both the short and long term.

The temporary shut down of the of the oil refineries due to the Hurricane Katrina and Rita in 2005 cause a direct impact to the market situation as supply and demand were thrown off imbalance. This occurs as the short term demand for the oil refineries exceed the supply on hand and increase prices. When the largest oil refineries in US were shut down due to the Hurricane, the supply of gasoline and other refined oil products were reduced approximately 10% . To ease the demand, supplies were imported from other parts of the country to the Gulf of Mexico region. Imported products are always more costly compared to local production, and this is one of the factor that causes the price to rise as well. As a result, supply was affected but demand still remain the same level, this caused the price to rise sharply.  (Chevron Corporation, 2011)

Works Cited

American Petroleum Institute, 2012. What's Up With Gas Price. [Online] 
Available at: http://gaspricesexplained.org/#supply
[Accessed 14 11 2012].

Caltex Worldwide, Chevron Corporation, 2012. Caltex. [Online] 
Available at: http://www.caltex.com/za/resources/determining-fuel-prices/
[Accessed 14 11 2012].

Chevron Corporation, 2011. The Price of Fuel. [Online] 
Available at: http://www.thepriceoffuel.com/whataffectsfuelpricing/
[Accessed 14 11 2012].

Demand Media, Inc., 2012. e How. [Online] 
Available at: http://www.ehow.com/list_5956282_factors-affecting-fuel-prices.html
[Accessed 14 11 2012].