PBL 5

  1. Investigating the laws of supply and demand in the oil market.

“The Oil Market is by its very nature inherently volatile because of the nature of oil as a storable and exhaustible resource and the influence of geopolitical factors on price.”

(The oil trading markets, 2003-10: analysis of market behaviour and possible policy responses)

http://www.jstor.org/stable/43741261

0217image2

https://www.iea.org/oilmarketreport/omrpublic/

From the graph we can se the demand and supply still get close with each other.

The current downturn has been brought on by a variety of factors including, but not limited to, the US tight oil revolution, the Organization of Petroleum Exporting Countries’ (OPEC) new strategy led by Saudi Arabia to protect market share rather than balance the market, the lifting of sanctions on Iran, growing inventory levels of crude oil and refined products worldwide, and expectations of lower world oil demand growth due to a worldwide economic downturn.

(https://www2.deloitte.com/us/en/pages/energy-and-resources/articles/future-of-oil-markets-next-five-years-marketpoint.html)

Balance of Supply and Demand
Demand for OPEC crude in 2016 averaged 31.3 mb/d, an increase of 1.8 mb/d over the previous year. In 2017, demand for OPEC crude is projected to average 32.1 mb/d, around 0.8 mb/d higher than last year.

(Monthly Oil Market Report (OPEC 2/2017)

http://www.opec.org/opec_web/en/publications/338.htm

This a complicated question, but it boils down to the simple economics of supply and demand.

United States domestic production has nearly doubled over the last several years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oils that once sold in the United States are suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems in recent years, have managed to pump at record levels.

There are signs, however, that production is falling because of the drop in exploration investments. RBC Capital Markets has calculated that projects capable of producing more than a half-million barrels of oil a day were canceled, delayed or shelved by OPEC countries alone last year.

Production in Venezuela, a portrait of political instability, is falling fast. Rebel attacks in Nigeria have also curtailed supplies in that region, and the continuing fighting in Libya has stymied efforts to get that country’s oil industry back on its feet.

These fluctuations, however, may be short-lived.

On the demand side, the economies of Europe and developing countries are weak and vehicles are becoming more energy-efficient. So demand for fuel is lagging a bit, although there are signs that demand is growing in the United States and China.

econ

Model to caculate oil price is very complex

Price changes affect both the quantity demanded and the amount
supplied. There are time lags involved on both sides. On the supply side
there are the lags associated with investment delays. In the short run
demand adjusts to price, and supply from outside the Gulf is relatively
unresponsive. Gulf supplies adjust to meet demand at the prevailing
price. Over the longer run both supply and demand adjust to price and in
turn influence the final determination of price.

( International Changes in the World Oil Market: A Simulation Perspective )

http://www.jstor.org/stable/1600846

2. Different forms of competition

  • Opec, Oligopoly

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Quick Reference to Basic Market Structures
Market Structure Seller Entry Barriers Seller Number Buyer Entry Barriers Buyer Number
Perfect Competition No Many No Many
Monopolistic competition No Many No Many
Monopoly Yes One No Many
Duopoly Yes Two No Many
Oligopoly Yes Few No Many
Monopsony No Many Yes One
Oligopsony No Many Yes Few

1. Monopolistic competition, a type of imperfect competition such that many producers sell products or services that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other. This market structure exists when there are multiple sellers who are attempting to seem different than each other.

2. Oligopoly, in which a market is run by a small number of firms that together control the majority of the market share.

  • Duopoly, a special case of an oligopoly with two firms.
  • Monopsony, when there is only a single buyer in a market.
  • Oligopsony, a market where many sellers can be present but meet only a few buyers.

3. Monopoly, where there is only one provider of a product or service.

  • Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.

4. Perfect competition, a theoretical market structure that features low barriers to entry, identical products with no differentiation, an unlimited number of producers and consumers, and a perfectly elastic demand curve. [1]

  1. What are the effects of alternative energy on the oil market? EX. Fracking,renewables.econMain consumption of oil comes from transportation.econOil consumption is the only one going down      http://www.eia.gov/outlooks/aeo/supplement/renewable/pdf/projections.pdf

8 eye-catching findings from this year’s report

    1. Coal and gas prices stay low. A projected supply glut for both commodities cuts the cost of generating power by burning coal or gas, but will not derail the advance of renewables.
    2. Wind and solar costs drop. These two technologies become the cheapest ways of producing electricity in many countries during the 2020s and in most of the world in the 2030s. Onshore wind costs fall by 41% and solar PV costs fall by 60% by 2040.
    3. Asia-Pacific leads in investment, representing 50% of all new investment worldwide. Despite slower growth in the near-term, China remains the most important center of activity.
    4. Electric car boom. EVs increase global electricity demand by 8% – reflecting BNEF’s forecast that they will represent 35% of new light-duty vehicle sales in 2040, some 90 times the 2015 figure.
    5. Cheap batteries everywhere. The rise of EVs further squashes the cost of lithium-ion batteries, boosting power storage and working with other flexible capacity to help balance renewables.
    6. A limited ‘transition fuel’ role for gas outside of the US, with only 3% growth in gas demand for power to 2040, and generation peaking in 2027.
    7. Coal’s diverging trajectories. Coal generation plummets in Europe and peaks in 2020 in the US and in 2025 in China; however it increases 7% globally due to rapid growth in other Asian and African emerging markets.
    8. 2⁰C scenario. On top of the forecasted $9.2tn investment in zero-carbon power, an extra $5.3tn is needed by 2040 to prevent power-sector emissions rising above the IPCC’s ‘safe’ limit of 450 parts per million.

https://www.bloomberg.com/company/new-energy-outlook/

Renewable energy price reduce, investment to renewable energy still high even when oil price is low. This will lead to lower oil price in a long future.

http://www.mckinsey.com/industries/oil-and-gas/our-insights/lower-oil-prices-but-more-renewables-whats-going-on

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