So you have all probably heard that oil prices have been depleting significantly but have you thought to pause and think what is the root cause of the fall in price?
Well, this can all be explained by the theory of supply and demand.
If we explain the cause behind the fall in price using supply, the American shale fields of Texas have increased production of oil by mixing the shale gas with sand and other chemicals to produce oil, the extra production causes a surplus of oil which allows the price to fall to try increase demand to get rid of the surplus. Not only this but notable members of OPEC, Oil Producing Exporting Countries, Suadi Arabia have declared that they will not turn off the taps to fight off competition from American Shale and they are willing to let the price fall as low as possible in order to achieve this.
In addition, the fall in price has been exacerbated by weaker global demand for oil from rapidly growing economies such as India and China as economic growth stutters.
The diagram shows that weaker global demand from rapidly growing economies shifts the demand curve to the left from D1 to D2 and the exploratory mining of American shale shifts the supply curve to the right from S1 to S2 and reduces the price from P1 to P2.
So who will benefit from the lower prices?
Firstly drivers as lower prices of oil will be fed through to consumers by lower prices of fuel so this will increase purchasing power enabling higher living standards.
As well as this, oil is a derived demand and is needed for the prodction of other goods therefore manufacturers see the benefit as costs are reduced so they can supply more at lower prices to be more competitive in their markets.
And who will be the loser from the fall in price?
US frackers as they have higher costs thus, the fall in price could force them to shut down.
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