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Facultyname:
Award of Business
BBA and Law UWE Student Id:
18045075
Module code: UMED8A-15-1
For checking by the student:
Module name: Understanding the Business and Economic Environment
Module run: September 2018
Coursework title: Global oil industry and market
______________________________________________________________
Due Date: 13 Nov, 2018
Module leader: (In UWE): _Dr Sahand Panah and Dr James Korovilas
________________________________________________________
Module leader: (In TBC): Gyanendra Adhikari
TURNITIN Checked: YES
Submission date & time: Date: 14 Nov, 2018________________________ Time: 2 P.M
________________

Total Word Count:1754 Total Number of Pages (including this front sheet): 10
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Signed: ________________________ Date: _30 OCT____, 2018

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Teacher's Feedback
GLOBAL OIL INDUSTRY AND MARKET 2008-2018

Crude oil is unrefined petroleum product composed of hydrogen carbon and other organic

material. Gasoline is so important in people’s life. It is used in the daily basis, every day we use

numbers of things that are run by oil. The most important is transportation. Transportation had

made a life easy to travel. Without oil we would never have a comfortable transport. Though

electrical vehicles have already in action, still every vehicles are run by oil. Crude oil is regarded

as a Black Gold as it is black color extracted from the land. The Organization of the Petroleum

Exporting Countries (OPEC) is an intergovernmental organization founded in Baghdad, Iraq,

with the signing of an agreement in September 1960 by five countries namely Islamic Republic

of Venezuela, Kuwait, Iraq, Saudi Arabia and Iran (Essay 2017).These countries were later joined

by 10 other members Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates

(1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975), Angola (2007), Equatorial

Guinea (2017) and Congo (2018). The automobile industry is a form of oligopoly market i.e. few

producer and large number of consumers and OPEC works on the same rule followed by

oligopoly market. About 1oo countries produces crude oil and 48%of the worlds total crude oil

production comes from Russia 13%, Saudi Arabia 13%, United States 12%, Iran-5% and Iraq-

6%.The world demand of the oil is increasing especially in china which makes approximately

66% of total demand in 1980 to 2008.

The crude oil price reached low of all the time in 1998 and just after ten years in June 2008, the

price of crude oil was all time high (McMahon 2017). July 2008 exhibits the extraordinary rise of

price at $150 a barrel and price fell sharply in the second half of July. The rise of the price in

2008 was due to the bad policies, bad luck, and incredible inattention to market details. Over
the two years and half Price increased to more than $100 per barrel in 2011 February and more

than $125 in April 2011. The start of the “Arab Spring” was the cause of increase in the price of

oil. Then over the following three year and half, the variation between the prices was from

$100 to $125. Due to the poor global growth forecast with integrate rise in supply and weak

demand, in early 2015 the price fell to below $50. In January 2016 they again fell to a low price

of just $27 per barrel and was the lowest level since November 2003 which fell by nearly $10 a

barrel. The price has increased slightly since early 2016 with more consistent rise above $75 per

barrel from summer 2017. The reason for consistent rise is due to the strong demand of oil

globally (Belton 2018, P.G 3). . The world demand of the oil is increasing especially in china

which makes approximately 66% of total demand between 1980 and 2008. Crude oil production

is increased in Libya, Iraq and Nigeria whereas the declined in Iran, Venezuela and Algeria. So

the supply of Iran fell by 150, 000 barrels a day due to political upheavals.
FIGURE: 1
The given diagram illustrates demand and supply of the oil market. The diagram show the fall in

the price P1 to P2 of oil leads to the rightward shift in the supply curve S1 to S2 as the demand

remain constant. Since the supply curve is shifted towards right then there will be increase in

supply. The period for 2008; 2014 and the latter part of 2015 and into 2016 shows the similar

graph for coffee prices.

The cause of price fall in 2008 was as the world economy slid into recession (Sloman 2016).The

reason for the price drop in 2014 was the law of demand and supply. The price drop shows too

much supply chasing less demand and development of substitutes like renewable energy was

the cause of fall in price of oil in 2014, which can reduce the demand of the oil (Samuelson
2014). Oil price fall as supply from top three producers Saudi Arabia, Russia and us set to rise.

Saudi Arabia and Russia set to raise supplies by 1 million bpd and in two years we output has

surged by over 27 pct. In early September the hydrogen bomb test done by the North Korea

that put pressure on the crude as traders moved money out of oil resulted in global oil prices

fall.(Gloystein 2017)

FIGURE: 2
In the figure we can see the supply curve making a leftward movement S to S1 as the price of

the oil is increasing from P to P1 that means the supply is decreased. We can see the rise of the

price oil from 2004 to 2011 and in 2018. In 2005 the hurricane Katrina caused tropical storm as

it made landfall across the Gulf of Mexico, and massive rainfall on southern Texas and

Louisiana. That destroyed oil refining and drilling. The hurricane disrupted quarter of the US

refining capacity. Thus the production of oil in Texas shut down and resulted in the increase of

the price. In 2011 Arab Spring pushed the oil price to a peak of $113 a barrel as protest rocked

Egypt, Libya and Tunisia. This caused the rise of price in the oil and decrease in the supply of the

oil.

D D1 S

S1 QUANTITY

The given diagram shows the demand and suppy of the oil. We can see the rightward shift in

the demand D to D1 and the leftward shift in the supply curve S to S1 as the price increases. The

shift of the demand curve may be due to more use of the oil and the shift is supply may be
because of the more refining of the oil using specialized equipments. Thus this phenomenon

leads to increase in the price P1 to of the more refining of the oil using specialized equipments.

Thus this phenomenon leads to increase in the price P1 to P2. The reason for the increase

demand of the petroleum is due to more consumption of the oil. As the world consuption will

rise from 95.4m barrels per day to 102.3m barrels per day in 2022 per day in 2022.

Price elasticity of demand is the ratio between percentage change and proportionate change in

quantity demand with the percentage or proportionate change in the price of commodity.
Elasticity of the product varies from product to product. Demand for the product that are

considered necessities is less sensitive to the price changes because the customers will buy the

product despite of the price change. When it is the case of oil, the demand and supply of the oil

is elastic in the long run and inelastic in short run. For example in the short run, the elasticity of

demand is quite low because in short run people will be willing to buy as they cannot make cut

in the oil consumptions. People are sensitive towards the price. But in the long run, the change

in price does affect the demand for the oil. People are insensitive towards the change in price

and despite of the change in prices people can make cut in the oil consumptions as moving

closer to their work place or using public transport. They can make more changes in the long

run rather in short run. Supply elasticity is the ratio between percentage or proportionate

change in quantity supply with the percentage or proportionate change in the price of the

commodity. So the price elasticity of supply is low in the short term and any changes made by

the producers will affect the long turn supply. The last ten years have brought incredible change

in the world oil market. As new oil supplies is increasing oil supply is being less elastic.

The main factor influencing the price of the oil is demand and supply. Iran as the world top

producer of the oil will help to increase supply, which will exceed demand. If the supply is more

than the demand then the price for the oil will decrease to attract the customers to buy the

gasoline.

Factor that influence equilibrium of global oil market is the current supply and output, recently

OPEC has supplied oil in quota system. However the production of oil doubled between 2011

and 2014, driving down the price. Hence OPEC has tend to increase supply lowering the price

per barrel. Future supply and reserve: large oil producing and consuming countries tends to
reserve the oil. When the oil has low price, they are stock piled but on the scarce of the oil, the

reserved oil is sold in the high price. We and Saudi Arabia has the strategic petroleum reserve.

Demand from the major countries also influence crude oil price. The price of the crude oil

increases as the demand for the oil increases. Political events and crises: natural disaster,

political issues, war are the factors affecting the crude oil price. For example, When Hurricane

Katrina destroyed hundreds of oil and gas platform, large price was increased in 2005 and “Arab

Spring” in 2011 resulted in the price hike up to $113 per barrel as protest rocked Egypt, Libya

and Tunisia. Then after the settlement of the protest the price returned to $100 per barrel

(Smart Touch Energy 2016).

Thus in 2018 the oil price has reached $80 per barrel for the first time in 4 years. The price of

the oil is expected to increase in the next year. Thus increase in price of the oil benefit for the

producer but it affects the consumer as some people cannot afford the high price of the

petroleum. Considering both the sides, consumers and producers the market price should come

to the equilibrium so that both the sides will be benefited.

REFERENCE

Henning Gloystein. 2017. Global oil prices fall after North Korea nuclear weapon test. [ONLINE]

Available at: http://independent.co.uk. [Accessed 14 November 2018].

John Sloman. 2017. Oil prices- the ups and downs. [ONLINE] Available

at: http://pearsonblog.campaignserver.co.uk/oil-prices-the-ups-and-downs/. [Accessed 14

November 2018].

Rich Smith. 2017. A Short History of OPEC. [ONLINE] Available

at: https://www.fool.com/investing/2017/03/19/a-short-history-of-opec.aspx. [Accessed 14

November 2018].

Robert J. Samuelson. 2014. Key facts about the great oil crash of 2014. [ONLINE] Available

at: https://washingtonpost.com. [Accessed 14 November 2018].

Smart Touch energy. 2016. Top 5 factors affecting oil prices. [ONLINE] Available

at: http://blog.smrttouchenergy.com/factors-affecting-oil-prices. [Accessed 14 November

2018].

Tim McMahon. 2017. Historical crude oil prices (table). [ONLINE] Available

at: http://inflationdata.com. [Accessed 14 November 2018].