Lower demand drives down price of oil(edited)

Essay by yukahamada22 March 2008

download word file, 3 pages 4.0

This article is about the falling price of heating oil which raises the oil prices in the market. Through this, we can clearly see that this article divides into two sections, the decrease of the price of heating oil and crude oil.

The law of demand is when the price of a good rises, the quantity will fall. The quantity demanded is the amount that consumers are willing and able to purchase at a given price over a given period. There are a few factors that may affect the demand to change for a good or service: expectations of a future price change, the income of the consumer, the number of the consumer, the price of the substitute of the good etc. The income and the number of the consumers are long term variables of oil. However, there are barely any substitutes for this type of good so the expectation of future price change is an important factor of heating oil.

Elasticity is the measure of the responsiveness of a variable to a change in one of its determinants. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Oil is a relatively inelastic good, so the quantity demanded is also not very sensitive to the change in the price. The International Energy Agency had sensed the future shortage because “heating oil supplies rose 640,000 barrels to 48 million”. “Heating oil for December delivery fell”,this can be shown on a supply and demand graph. The initial quantity was at Q1 (640,000 barrels) and the price was set at P1 ($2.5821). Since there was an increase in the supply from Q1 to Q2 (48 million barrels), the price falls from P1 to P2 ($2.5021). This causes the demand to increase from...