What Determines the Oil Prices (Multiple Choice Questions Sample)
explain what determines oil pricessource..
1) What has happened to the price of oil since the beginning of January 2020? According to the article which country, Russia or Saudi Arabia, is in a better position to sustain prices at this low level for the longest period of time? Justify your answer.
Oil prices have been on a steady drop since January 2020. Due to corona virus, movement was greatly curtailed and a lot of businesses shut down. This led to a drastic drop in oil demand which in turn has affected oil prices negatively.
Although Arabia has lowest oil production rates in the world, its economy almost entirely depends on oil sales and it cannot handle oil prices going lower than 50 dollars a barrel as this will dry out its coffers. This gives Russia an upper hand in sustaining low oil prices for a longer than Arabia since it has many contributors to its inflow income and its economy is not over reliant on oil sales. This means than even though Russia spends more on oil production than Arabia, it will be able to sustain low prices for longer as compared to Arabia.
2) According to the article why has Saudi Arabia decided to increase oil production to record levels at this time? (16 marks)
Arabia has decided to increase its oil production to 12.3m barrels a day from their usual average of 10m barrels a day. This is after it waged an oil price war against its rival oil producing countries like Russia and USA, keeping in mind that these countries have increased their oil production in the recent years, challenging Arabia’s oil market. They did this in a bid to maintain and secure their dominance in the oil market. This came after Russia refused to heed the OPEC advice of limiting oil production during this period when oil demand is low. By doing this, they hope to crumble oil prices further to the point where it will be pointless for Russia to keep producing oil due to the huge losses they will be making. They have boosted this move by giving their key buyers discounts for every oil purchase they make to discourage them from turning to the Russian oil market and further destabilize the prices. Increasing their oil supply is a just a move to secure their oil market dominance.
3) Using demand and supply diagrams examine the most likely causes for the fall in the price of oil since the beginning of January 2020. (20 marks)
Demand and supply forces are the key determinants of prices in the market. The point at which demand meets supply marks the market price. An increase in supply means a decrease in prices while an increase in demand means an increase in prices. However, this does not always apply to oil as its supply and demand is inelastic. This means a change in prices does not necessarily mean an increase or decrease in supply or demand. In the diagrams above, p is for prices, q for quantity, s for supply and d for demand. When supply increases, the curve shifts to the left leading to higher prices and vice versa. When demand decreases, the curve shifts to the left and the prices decreases. This is what has been happening since January 2020 where the pandemic led to drastic reduction of oil demand causing the prices to drop. Despite the drop in demand, oil producers did not cut on production; they even proceeded to supply more which further reduced the prices. Thus, the fall on oil prices can be attributed to decrease in demand and increase in supply.
4) What is a cartel and how does it influence the price and output of oil. In your answer you should refer to the type of market structure normally associated with a cartel and the features which help or hinder collusion. (24 marks)
A cartel can be described as a group of individual businesses or countries producing the same commodity that merge together to form what is seen as a single producer to enable them to control supply and prices of their common produce without competition. OPEC (Organization of Petroleum Exporting Countries) is an example of an oil cartel. OPEC is able to influence oil prices by convin
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