Demand and Supply of Oil

Essay by buzayedUniversity, Bachelor's January 2005

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Oil is one of the most valuable and scarce energy resources in the earth, and in order to assess the recent developments in the price of Oil in world trade, it is important to analyze the underlying forces of demand and supply. As energy is an important vehicle of production and growth, Oil is still its main source and has no competing substitute to replace it altogether in the foreseeable future. The UAE is one of the biggest suppliers of the Oil in the world, and as a member of OPEC price and supply of Oil is controlled by the 10 members of the OPEC and Non-OPEC countries.

Yr Oil Price Tq Oil Demand Tq Oil Supplied OPEC Supplied OPEC Share

00 24 76,000,000 76,900,000 25,400,000 33%

1Q 27 76,300,000 76,300,000 26,200,000 34%

2Q 29 75,300,000 75,400,000 26,700,000 35%

3Q 24.5 76,500,000 76,500,000 25,201,000 33%

4Q 25 77,600,000 76,900,000 24,201,000 31%

01 21 76,400,000 76,300,000 23,201,000 30%

Demand of Oil

Demand for Oil is a derive demand according to its many diverse uses.

Oil can be used to satisfy the needs of Mankind . Oil is used as the main source of energy and as the major input in all petrochemical industries, which could provide us with our needs. Demand for Oil within a certain band of process and within a certain time interval is inelastic. This means that if there is a relative increase in its price within a certain affordable band, the relative change in the quantity demanded for Oil will turn out to be less than the relative change in its prices. So quantity demanded for Oil related to its price. Consumers are rational decision makers, therefore if price of Oil is acceptable they decide to buy more to maximize their benefits and vise versa.

The graph bellow shows the price of Oil Verses the Demand of Oil by consumers.

The effect of increase in demand (excess of demand) for Oil causes the curve to shift outward and leading to an increase in Oil prices. On the other hand Suppliers always tries to follow the demand curve by increasing their supply of Oil to keep the prices of Oil stable.

Supply of Oil

Faced with such an inelastic demand within a certain affordable bad of prices, Oil producers could always increase their revenues if they offer fewer units for sale. So supply restriction is then a method by which Oil producers could increase their revenues. And they try to maximize their Oil revenue without interrupting the demand of Oil by the consumers. They try to keep price level under which new Oil development and alternative energy introduction cannot progress largely. And keep price level and fluctuation under which long-term investment can be made surely in their Countries and Consumers countries. The graph bellow shows the Supply curve of Oil.

The effect of increase in Supply (excess of Supply) for Oil causes the curve to shift inward and leading to a decrease in Oil prices. Therefore Consumers will always wait to see if the price will keep on decreasing to maximize their benefit and buy more Oil for low prices. On the other hand Suppliers always tries to follow the demand curve by decreasing their supply of Oil to keep the prices at a reasonable amount.

Supply and Demand Equilibrium of Oil

The importance of plotting the supply and demand curves for Oil is that to see how consumers and suppliers react to price changes. This fluctuating is due to price changes (and other changes such in the prices of other products, income, population, cost of production, etc). This point tells us that a certain price level that is accepted by both consumers and suppliers, and in Oil industry such equilibrium is always sought for many reasons such as to prevent Oil product inventory and refining plants in consumer sides and for more crude Oil exploration and development in producer side. Therefore OPEC always tries to keep demand and supply in balance.


OPEC always have meeting every 3 months to decide whither to increase or decrease the supply of Oil and this is all because the effect of price of Oil on its members and consumer GDP growth. 2003 demand of Oil assumed to rise 1.1 million barrels a day and reach 77.3 million bpd. OPEC should prove enough to satisfy most of next year extra consumption if it want to keep crude Oil price near its $25 a barrel price target.

Furthermore OPEC must interfere as soon as it sees any excess in demand or supply of Oil which might causes an increase or decrease in Oil prices.


1) Gulf News.

2) google

3) Norwegian Energy Ltd