NOTE: These papers are meant to make you think and contain thoughtful opinions.

The question on everyone's mind is, "When will oil prices decrease, if at all"? Americans are witnessing the effects of supply and demand when they purchase gasoline, home heating oil, and other petroleum products. As long as supply and demand are the only factors affecting the price of oil, we would see a stabilization of the price over time. However, todays industry thrives on petroleum to the extent that governments must become involved in its procurement in order to insure the nations security. This presents a whole new facet to the supply and demand equation that will create price instability for a while to come. Due to this country’s and other countries dependency on petroleum we see less elasticity in its price.

Demand

'The ideas expressed above are the foundation of the law of demand: Quantity demanded rises as price falls, other things constant. Or alternatively: Quantity demanded falls as price rises, other things constant.' (Colander, D., C., (2004), pg. 84).

The problem that one notices, when looking at this demand curve and considering the demand for oil, is that the demand for oil is not decreasing as the price increases. (Simmons, M., R., (2005), n.p.). The reason for the reverse demand curve is due to the global dependency upon oil and the lack of alternatives. Global demand will continue to increase due to the emerging economies of India and China. It will take time to decrease oil dependencies and create alternatives. In order to decrease the price of oil in the short term we must look to the supply side of the equation.

Supply

'There's a law of supply that corresponds to the law of demand. The law of supply states: Quantity supplied rises as price rises, other things constant. Or alternatively: Quantity supplied falls as price falls, other things constant.' (Colander, D., C., (2004), pg. 91). However, the supply graph for oil looks a bit different, because a conglomerate, OPEC, controls it.

The oil supply graph is a horizontal graph with decrease in production that corresponds to decreases in the price per barrel of oil. OPEC has stated they will increase the supply of oil to the market to try and offset the supply problems caused by hurricane Katrina, but the supply problem was occurring prior to the natural disaster and its impact on oil production in the Gulf Coast Region of the United States.

Price

The price of any product or service is can be determined by looking at the supply and demand graphs for that product of service. Looking at the supply and demand graphs for oil for the year 2004 we see that supply is 74 million barrels a day and demand is 84 million barrels per day. We see that there is definitely an imbalance in favor of the suppliers. This will result in a supply side shift of the graph in reference to price, because the demand is also rising. A historic oil price graph shows this shift in regards to supply and price.

(ETRG Economics, (2005), n.p.). An important aspect of this graph is the price indexing to 2004 dollars. This indexing allows for a true comparison of historic oil prices. The graph also shows that oil prices will continue to rise as long as the demand for oil is greater than the supply of oil. We will see a decrease in oil prices only when demand is decreased, which would mean a change in life-style of many Americans.

Supply and demand graphs help to visualize the basis for the price of a product or service. Oil is a non-renewable commodity. We have many 'un-tapped' oil fields, however, this would only prolong the inevitable price rise to a point that economies begin to falter. The 'invisible hand theory—a market economy, through the price mechanism, will tend to allocate resources efficiently,' (Colander, D., C., (2004), pg. 12) will be part of the solution to our oil problem. Our society will shift their automobile purchases from SUV's to smaller, more fuel efficient cars and start to use mass transit in order to avoid having to pay the higher oil prices. However, order to keep the price of oil low, we need to develop alternatives to its usage, such as atomic, wind, and solar energy. We must also seek to stabilize the nations that house the oil suppliers and also the oil supply routes. I feel the War on Terrorism has only added to the instability in the oil markets, and not helped. That being said, we can expect the price of oil to climb even higher in the near future.

Reference

Colander, D., C., (2004). Introduction: Thinking Like and Economist. Economics (5th ed.), pg. 12. Retrieved September 5, 2005 from eRsource.

Colander, D., C., (2004). Supply and Demand. Economics (5th ed.), pg. 84. Retrieved September 5, 2005 from eRsource.

Colander, D., C., (2004). Supply and Demand. Economics (5th ed.), pg. 84. Retrieved September 5, 2005 from eRsource.

Colander, D., C., (2004). Supply and Demand. Economics (5th ed.), pg. 91. Retrieved September 5, 2005 from eRsource.

Colander, D., C., (2004). Supply and Demand. Economics (5th ed.), pg. 91. Retrieved September 5, 2005 from eRsource.

Energy Information Administration, (2005). Retrieved September 5, 2005 from http://www.eia.doe.gov/mer/pdf/pages/sec11_4.pdf.

ETRG Economics, (2005). Retrieved September 5, 2005 from http://www.wtrg.com /prices.htm.

Simmons, M., R., (2005). 2005 oil outlook: Is this the year when demand outstrips supply? Retrieved September 5, 2005 from http://stcwa.org.au/journal /020405/1110805224_3789.html.