Demand and supply in action - oil

A new market forecast from the International Energy Agency provides a useful example to use when helping students understand the interaction of supply and demand.

According to The Times, the IEA is predicting a fall in global demand for oil in 2009 - down by 2.4 million barrels a day - due to the worldwide economic slowdown.

“The IEA said that only 83.4 million barrels of oil would be needed a day this year, 2.8 per cent lower than last year after “much lower-than-expected; economic growth in the global economy”,

That means that the market demand curve moves across to the left, which in theory assumes that the price of oil will continue to fall/stay low. That all depends on what happens to market supply - a decision which is largely in the hands of the oil-producing cartel OPEC which provides around forty per cent of the world’s supply of crude oil.

For the moment, stocks of unsold oil are rising and this is putting downward pressure on prices. Indeed there are stories in the media of full oil tankers staying out at sea waiting for the world price of oil to rise!

This is all far removed from the summer of 2008 when oil prices were rising sharply and some commentators were predicting an oil price of $200 per barrel.