Economies, Markets and Strategic Decisions - Essay Example

It affects almost our entire lives, from the quality of our lives, our health and well-being; it determines not only our choice of transportation means but also our choice of work, and status2. Oil also affects our economic well-being, family structure, choice of friends and status in the society. It is with no wonder that, All things being equal an increase in the demand of a commodity will increase the price in the short run and supply in the long run. This is certainly true, for the short period in the case of an ordinary commodity.

In the case of oil, the number is highly dependent on the availability of reserves. In the case of commodity, an increase in price would ensure an increase in supply which would serve to check the rise in price. Production on a larger scale leads to improved methods of production, and a fall in price below its original level. In the case of housing, no such reaction is possible3. There is nothing, to restrain the price (and the rent) of housing from rising indefinitely without limit, if the demand continue to increase.

Conversely, if the demand for houses falls off, there is nothing to check the consequent fall in price and rent. In the case of ordinary commodities, supply would be diminished, because most things are either consumed4.1.2 Demand and Supply Forces determining the price of OilOver the last thirty years, OIL prices have risen in real terms by around 2 ' % a year and according to HM Treasury (2003) report this stands in contrast to other European countries such as Sweden, France, and Germany where real house prices have decline or remain relatively constant.

In a study conducted by Guri (2003), it was postulated that low oil supply responsiveness must have contributed in greater trend increase in real oil prices in the world before the outbreak of the credit crunch that started at the end of the year 2007.According to Kuenny et al. (2007), paradoxically, while there is a problem associated with a shortage of hydrocarbons, there is also a problem associated with their superabundance which results in the release of carbon emissions into the atmosphere producing a dramatic impact on climate (Kuenny 2007).

Kuenny (2007) stipulates that, the latter problem appears more important than the former, geopolitical crises, which may be generated by a shortage of hydrocarbons, appear to influence public opinion more than progressive climate change. Unless new energy fields can beFigure 1 and TwoFrom Figure one above, an increase in the demand for oil from D1 to D2 has not been matched by a corresponding increase in the supply of oil. Oil are not like ordinary commodities. This has forced up price for oil from P1 to P2.

This is because with the present state of the world economy, market, higher demand is translated into higher prices than supply. With the government weak oil supply in the previous years, and it inability to assume responsibility to increase the number of oil reserves, prices will continue to increase As supply becomes more elastic over time, assuming the conditions of demand remain unchanged, we expect to see downward pressure on prices and a further increase in the equilibrium quantity of oil bought and sold5.

Because of the time lags and resources