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Oil Prices

Essay by review  •  July 18, 2010  •  Essay  •  1,065 Words (5 Pages)  •  1,254 Views

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The rise in the price of oil can be traced to a a simple factor, but there are several other contributing factors.

The simplest explanation is that the demand for oil is greater than the current production. When demand exceeds supply, price will increase as people are willing to pay more to ensure that they get their scarce resource (oil in this case).

Depending on your political views and knowledge of the situation, you may also believe that the production of oil is much lower than capacity because certain middle-eastern countries know that America depends on oil imports more than other countries. An increase in oil prices will lead to a slightly weaker US economy.

If you want to know why gas is more expensive, see the simple reason above but also factor in the greed of the oil companies. Unfortunately, Americans have put themselves in a position where they consume very large quantities of gas, and they have no other legitimate fuel alternative. What this means to gas companies is that they can increase the prices substancially, and because Americans "need" so much gas, they will be forced to buy it at the higher price (or go without driving).

The other reason is that OPEC is a large cartel arrangement that has the sole purpose of profit maximisation as a whole. Thus they set the industry MR and MC to maximise profits for the industry as a whole as opposed to competing amongst eachother - this allows OPEC to effectively limit the output so that it corresponds to the profit maximising level and drive up the price.

According to one estimate world demand will grow by 1.3% per year by 203070 %of the increase in oil demand will

come from developing countries, notably

India and China, where oil demand grow by 2.5 %.

Why Oil prices are rising *Economic strengthening in the US *strong economic performance in developing Asia *1990 to 2003 world demand for oil grew at the rate of 1.3%. *Some of the countries in Asia have started building their own reserves.

In Pakistan the energy consumption

*It has grown at an annual average rate of

4.4 percent from 1990-91 to 2005-06

Demand Of Petroleum in Pakistan

Demand of petroleum products in the country is about 16 million tons. *18 % are met through local resources while the balance 82 %. *International oil price fluctuations have a

direct impact on the oil prices in the local market.

Oil Consumption, Future Demand and Imports *Pakistan economy is growing and so is the energy demand. Consumption of

and its

products grew sharply during the 1980s and 1990s at about 6 percent per

annum, but has

become negative in the last five years. Consumption of petroleum products

grew negatively (-

3.4 %) in between 2000-01 and 2005-06 (Table 4). In 2005-06 Pakistan

consumes 16 million

TOE of petroleum products (in Table 4 below non-energy products consumed

are not

included). Out of which almost 15 million TOE are energy products. Dieseldespite negative

growth in the last five years accounts for 52 % of total oil (energy) products

consumed, motor

spirit accounts for 8.4%, aviation fuel 5 %, kerosene 2%, and HOBC accounts

for a very minor share of 0.06 %.

Vulnerability to rising oil prices also

depends on the intensity with which oil is

used. The intensity of oil use in energy consumption index measures the share of

oil in an economy's primary energy

consumption. Oil intensity in Pakistan has

declined over the years because of

switching to alternatives, more specifically

gas and to some extent coal.

Oil Reserves and Refining Capacity : Pakistan has oil reserves of around 300 million barrels as

on June 2006 The major part of produced oil comes from

the reserves located in the southern half of the country,

where the three largest oil producing fields are located (in

the Southern Indus Basin). In addition, some producing

fields are located in the middle and upper Indus Basins.

Since the late 1980s, Pakistan has not experienced many

new oil fields. As a result oil production has remained

fairly flat, at around 60,000 barrels per day. While there is

no prospect for Pakistreach self sufficiency in oil, the government has encouraged private (including foreign) firms to develop domestic production capacity.


Since 2003, oil prices are constantly on the rising

side. End of 2007 has seen the maximum of $100

per barrel. This rising trend in oil price in the

international market has hurt the economies of

many countries in the world including that of

Pakistan. The extent to which economies hurt as a result of price shock depends on the country's




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