PBL Trigger 2 Problem:
What are the effects of supply and demand of oil industry?
Keywords: Supply & Demand, Oil industry, Economy, Alternatives, Environment, Elasticity, Unelasticity, Peak demand, renewable sources
LO1: How economies are affected by oil industry?
LO2: Why consumers are not choosing the other alternatives?
LO3: Oil demand is growing, why it isn’t slowing down?
Introduction:
It has been argued that the oil demand will peak because of consumers choosing alternatives such as electric vehicles (EVs), and will no longer need oil. Leading to the scenario that increase in the bio-fuel production will cause the demand of oil permanently decline. Yet the studies show that over the years, oil demand has grown each year and has not been slowing down.(Rapier 2017.) So, the question is why is that, and what are the effects of the supply and demand of the oil industry to the world? In this research blog post I am going through some of the factors from different perspectives to find out effects and reasons that can tell us which direction the oil industry is going.
How economies are affected by oil industry?
Economies are affected by oil industry in many ways. Firstly, it is important to acknowledge that the demand of oil also varies strongly depending of the nation and its developing process.
The oil demand in rapidly developing nations (mostly in Asian countries and India) is much more heightened as demand from developed countries (the OECD countries such as US, Canada Australia, European countries…) when it comes to the in the real price of oil and in oil production.(Aastveit & BjØrnland & Thorsrud 2013, 1.)
This means that different nation’s economies respond differently to unexpected oil markets. Even though economic activity in most of the European countries and the US is permanently reduced following oil supply and oil-specific demand curves, the economic activity in rapidly developing countries decreases less, and can even increase time to time. Some of the still developing countries can be crude material exporters that can benefit from higher terms of trade. And on the other hand, the studies show that countries that are more open and with high investment shares in GDP are usually less negatively affected by higher oil prices.(Aastveit & BjØrnland & Thorsrud 2013, 28-29.)
“Higher energy prices typically lead to an increase in production costs and inflation, thereby reducing overall demand, output and trade in the economy. The market economies have experienced rapid growth in economic activity and international trade, outperforming most developed countries across the world. At the same time, the real oil price has more than doubled, without any apparent severe negative effects on the global economy.”(Aastveit & BjØrnland & Thorsrud 2013, 2.)
Moreover l it is argued that the global oil markets are becoming increasingly competitive, and for major oil producing countries they need to adjust and find new ways to shape their economies for the future. They can no longer rely only on their income from oil since the markets are constantly changing and developing.
Why consumers are not choosing the other alternatives?
Most of the consumers, population, are coming from still developing countries that cannot necessarily afford to the alternatives so easily than in the developed countries. The population of the developing countries is constantly growing, and their economies cannot keep up and support everyone. So even though the more stable countries (OECD) are becoming day by day more efficient with the energy use and choosing alternatives to oil, in a larger scale they are only a minority of the population(consumers) of oil in the markets.(IEA 2018.)
In other words, the more stable countries, economically and growth-wise, are choosing the alternatives and adapting more sustainable lifestyle decisions, such as electric vehicles, mass transits, hybrid vehicles and biofuels. Still despite these adaptions done in a wealthier country the general growth of the population and increased urbanization will keep the oil consumption growing. It is argued that the global demand for oil will likely grow until about 2040 where it is expected to peak up and start to decline.(IEA 2018.)
Oil demand is growing, why it isn’t slowing down?
“Oil demand is growing faster than expected and the world will need more crude from the Organization of Petroleum Exporting Countries, or risk high prices that damage the economic recovery.”.(Herron 2011.)
So, it is all about how fast will the societies and still developing countries meet the basic standards of living for consumers and when they are ready/when it is possible for them to adapt the transformation in technology of electric cars and other alternatives.(IEA 2018.)
Oil consumption is and will be driven by the consumer demand. Therefore, oil demand keeps growing and the markets keeps chancing. Biggest reason for the growing demand is still the fast growth of the population. Especially in the developing countries where the oil consuming is also growing since there is not yet easy to change for the alternatives like biofuel, electric cars and so on.
Resources:
Duey R. Senior Editor for E&P, .Global Refining & Fuels Report; Houston Vol. 15, Iss. 5, (Mar 8, 2011): 19-21. Report: “Oil Markets Tightening Rapidly to Meet Growing Demand” https://search-proquest-com.ezproxy.haaga-helia.fi/docview/1528076001?accountid=27436 . .Accessed: 16.9.2019
Herron J. Dow Jones Institutional News; New York [New York]18 Jan 2011. ”OECD Oil Demand Still Growing Faster Than Expected-IEA” https://search-proquest-com.ezproxy.haaga-helia.fi/docview/2160144506?accountid=27436 .Accessed 16.9.2019
IEA, Projections from the International Energy Agency, World Energy Outlook 2018 “The gold standard of energy models.” Share talk. “Understand the Future of Global Oil Demand”. Published: 16.5.2018 IEA [IEA, 2018), [World Energy Outlook 2018], All rights reserved. https://www.iea.org/weo2018/ .Accessed: 16.9.2019 https://www.youtube.com/watch?v=iImChz9sUbg .Accessed: 16.9.2019
Knut Are Aastveit, Hilde C. BjØrnland BI and Leif Anders Thorsrud BI. “What drives oil prices? Emerging versus developed economies” CAMA Working Paper February 2013. Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy.
https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-03/11_aastveit_bjornland_thorsrud_2013.pdf Accessed: 16.9.2019
Rapier R. in Forbes. Jun 19, 2017. “The U.S. Accounted for 98% Of Global Oil Production Growth in 2018” https://www.forbes.com/sites/rrapier/2019/06/23/the-u-s-accounted-for-98-of-global-oil-production-growth-in-2018/#2aa9bba05125 .Accessed: 16.9.2019
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