Economic News Analysis

NEWS REPORT ACTIVITY

ARTICLE TITLE: OPEC Chief Predicts Output Cuts

ARTICLE PUBLICATION DATE: Sunday, 7 December 2008

SOURCE: KHALEEJ TIMES

ECONOMIC CONCEPT(S): LAW OF DEMAND AND SUPPLY

The article discusses OPEC's (Oil and Petroleum Exporting Countries) likely decision to reduce the output levels in order to achieve a control on the drastically falling prices. It mentions the extreme fluctuations in the oil prices, dropping to as low as $40.81 and reaching as high as $140 a barrel. The aggregate demand for oil has decreased, hence reducing the prices. The article illustrates the concepts of demand and supply.

ARTICLE ANALYSIS:

Oil prices have decreased tremendously over the past few months. The world is currently experiencing a recession, which has reduced the level of economic growth, and since petrol has a derived demand, the demand has fallen.

The graph shows a decrease in the demand which has reduced the prices of the oil due to an overall fall in the aggregate demand. The initial price in equilibrium was P, where the quantity demanded was Q. As the prices cut down from P to P' the quantity demanded reduced from Q to Q'. The shift in the demand curve is caused by the change in consumers' income brought about by the recent recession- a two consecutive quarterly decline in GDP (Gross Domestic Product) growth rate. Due to the recession the demand for many consumer goods has fallen resulting in the closure of various factories, in turn reducing demand for petrol.

Secondly, as stated in the article, the producers of oil are reducing their supply in order to strengthen the falling oil prices. They want to make this change more "severe" and it is approximated that there will be a reduction of 2 million barrels per day in their supply. Their decision to make this a more rigorous change is because their previous decision to cut the supply by 1.5 million barrels a day was unsuccessful in maintaining high prices.

This diagram illustrates the decision of OPEC, where supply (move towards the left) cuts will increase the price of oil. The price P with quantity supplied Q, was the initial equilibrium level. After the tentative plan of OPEC, the prices will rise from P to P' and quantity supplied with fall from Q to Q'. If we show the combined effects of the two graphs, it should look like the following:

The graph represents OPEC's decision of increasing oil prices by reducing supply considering the fall in demand. OPEC wants to reduce the volatile condition of the oil prices by reducing supply,