Supply Up, Demand Down, but Oil Prices Rise

Article: Supply Up, Demand Down, But Oil Prices Rise

SUMMARY: The article, Supply Up Demand Down, But Oil Prices Rise, argues that recessions normally bring low prices for oil and gasoline, but the opposite is now happening. Although the supply of oil has gone up, and the demand has fallen, oil prices continue to rise. The oil market appears to have broken the laws of demand that states that when supply goes up and the demand falls, the result is a decrease in price. Fuel prices are rising so drastically and many economists worry that another fuel-price spike above $4/gallon could occur. Some argue that China's increasing oil consumption is to blame. Many analysts believe that speculative oil investors are the cause for this phenomenon. Limiting trades may be the answer to loosening the control that speculators have on rising prices.

ANALYSIS: As a consumer, I have obviously noticed the rapid rise and drop in the price of oil and gasoline. The price of oil and gasoline does not always follow the law of demand because it appears to have an inelastic demand in the short term. Inelastic demand means that changes in price do not affect the supply and demand of oil and gas. Even though the price of oil continued to climb, the demand did not fall because fuel has become a necessity that many consumers will continue to buy even when prices rise. I also believe that speculators play a great role in rising oil prices. When investors purchase large quantities in hopes of higher future prices, this causes oil and gas prices to rise even though demand is weak. I agree that Congress should implement provisions to limit the control that speculators have on rising oil prices.

AUTHOR COMMENTS: The author appears to be most concerned with what will happen to gas prices when the economy improves, since the current price is high although demand is low and supply is high. With high unemployment and a weak economy, consumers cannot afford for gas prices to rise above $4 a gallon. Rising gas prices appears to be a "speculative bubble" since demand is not driving the increase in price and the economy remains weak. Speculators definitely appear to be in control of prices. Limiting trades is the most logical step towards controlling gas prices. I feel that the author fails to mention that oil and gasoline has become a necessity, so it therefore has an inelastic demand. Whether prices rise or fall, people will still continue to buy because the need to travel is still present. The price of a good does not always follow the laws of supply and demand.

Sources:

Baker, David (2009) "Supply Up, Demand Down, But Oil Prices Rise." [Electronic Document] Accessed from http://articles.sfgate.com/2009-05-24/business/17200359_1_oil-prices-oil-costs-oil-market on December 2, 2011

Gjelten, Tom (2009) "Despite