Oil as an Exception to the Rules about Demand and Supply

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Oil Plant

The first principle a student learns in their beginner economics lecture is that people’s wants and needs are infinite, while the resources needed to satisfy these needs are limited in nature. This concept is formally known as scarcity. Scarcity has plagued nations for centuries forcing countries like Jamaica, to import significantly more than they export in order to feed the nation. Scarcity is the premise on which prices are set which then drive the laws of demand and supply. It is imperative that everyone understand how these two concepts interact and extends to different economic principles. One worldwide commodity that defies the laws of economics is oil.

Oil has become a necessity in today’s economy like water and air. Basic supply-and-demand theory states that the more of a product is produced, the more cheaply it should sell. The reason more oil was produced in the first place is because it became more economically efficient to do so. Companies created techniques to double supply with only small increments in cost. Since the output of oil has increased over the years along with demand staying static, prices, based on the law, should fall. However, that is not what has been taking place on the world market. What has been happening is the influence of cartels within the industry. OPEC controls 40 percent of the world’s oil supply and are so able to impact the price per barrel. What most of the population doesn’t know is that OPEC was founded in the 1960s to fix oil and gas prices. They achieved this by restricting production, and were then able to force prices to rise, and thereby enjoy greater profits than if its member countries had each sold on the world market at the going rate. Throughout the 1970s and much of the 1980s, it carried out this unethical strategy, possibly out of greed for money and power. We view oil as the exception to the price-demand-supply rule. These economic factors only have strength in determining price when it influences oil futures contracts. Regardless of how the price is ultimately determined, based on its use in fuels and countless consumer goods, it appears though that oil will continue to be in high demand for the foreseeable future.


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