CASE STUDY

The Price of Oil



The Price of Oil

Question number 01

“The price of oil the decade 1960s and 1970s shows in figure two “Case Study” oil price reduces in these decades. Initially the actual control program had an ambiguous impact on the level because the effects have been much different, but increased the decay rate of oil production.” (Smith and Phelps)

The rise in petrol prices is largely down to the cost of crude oil. From 1960 to early 1970s the price of oil was considerably lower than to date. During those years costing around £0.004 per litre, in the first oil price shock of 1973 the price rose rapidly peaking in 1979. The second oil shock increased the price to a peak of £0.136 in 1984. In 1986, the real price of oil fell sharply and remained low until the 1990s. It was in 2000s that the oil prices started rising once again, and it had exceeded its 1984 peak price by 2005. In the first half, of 2008, the price of oil was exceptional reaching a record peak of $147.27 per barrel on July 11th; it has never risen so fast since 1979.

According to the AA, the UK is not the only country to suffer from rising petrol prices. Research confirms that overseas prices have also risen. However, the UK has the tenth highest unleaded price and the second highest diesel price in Europe. Although, the price of oil is high, taking into account the growth and decline of other product's price, it is clearly noticeable that the real price of oil has risen more slowly than other prices in general; therefore, oil has become more affordable. In 1960, the real price of oil was £0.074 per litre, and the average income in the UK was £496. In 2006, the real price of oil was £0.227 per litre and the average income in the UK was £1351. This shows that it was cheaper to buy oil in 2006 than it was four decades ago. However, since last year the real prices of oil have raised again. Its affordability is lower than in past times, therefore, it can be concluded that oil prices are currently exceptional - not only for being so high, but also for not being as affordable as in the past decade (WTRG Economics).

Question number 02

There are some factors which have directly influenced the increased demand for oil such as the price of oil - the lower the price the greater the quantity demanded. Although, the oil price has risen recently, its demand is still high due to not having any cheaper alternatives, but, in a long term, this might change, the price of complementary products - Currently the high price of energy sources (e.g. - Natural Gas) limits the possibility of switching to substitutes, complimentary products - In these goods (i.e. - cars), oil is only one of the many other costs necessary of their operation, and this is the reason why the oil ...