Long Term Theories and Short Term Factors
Long Term
Multiple Equilibrium
The theory of the Supply and Demand graph of Oil having multiple equilibri revolves around the fact that oil producing countries see oil, a finite commodity, as a an investment. When the demand for oil increases drastically, as it has over the last five years, the oil producing countries reduce their levels of output to ensure their commodity will last longer. By doing this, the price of oil rises to the higher point of equilibrium. This theory explains why the price of oil collapses when the World demand decreases and why the price sharply increases with the slightest increase in demand.
Rapid Demand v. Limited World Supply
As just stated, the supply of oil is a finite commoditity. Experts have stated that the world has been drilled to the maximum and there are no more oil reserves to be found. With the world's supply of one of its most valuable resources facing the threat of being used into extinction, the countries that produce this commoditity are naturally going to try to reduce the amount of this commoditity and in turn, allow the commoditity to last a little longer. In addition to the supply problems, the rest of the world is starting to demand more oil than ever before. The rising Asian markets have accounted for nearly 40% of the increase in world's oil demand. With these two factors competing for the same commoditity, it is only natural that the price of oil would sky rocket.
Short Term
Throughout the history of America's oil consumption there have been many events that have affected the price of oil. These events usually have not affected the price in the long run but have often temporarily caused the price of oil to increase.
War and Conflict
- War on Terrorism in Iraq causes uncertainty that the United States would be supplied with oil from its largest distributor. The Middle East is the world's largest distributor of oil and when its oil fields are battle grounds it creates uncertainty within the market therefor pushing prices upward due to speculation.
- The conflict with Venezuela affects the short term increase in the price of oil because of the constant negotiations between the United States and Venezuela about supplying oil to the United States. Venezuela has started to deny oil exports to the United States and specualtors use this to bid up the price of oil. This only effects the price in the short term because the United States imports oil from several other countries.
- Conflict with Iran and it's Nuclear weapons
Natural Disasters
- Hurricanes and other natural disasters, such as Hurricane Katrina in the southern United States affected the price of oil in the short run due to a shortage in resources, a lack of transporatation and power outages in the Gulf Coast region preventing the trade of oil.
