Oil and its Economics

Supply of Oil

“Since 1974 oil-exporting nations have substantially increased their imports in order to finance development plans and to pay for highly technical military training, equipment, and sophisticated defense systems such as the airborne warning and control system, AWACS. From 1972 to 1983, OPECs imports increased approximately sevenfold. Furthermore, exports to OPEC from OECD as a percentage of the latter's total exports increased from 4.1 percent in l972-73 to 8.8 percent in 1975-82, then to 8.4 percent in 1983; and it dropped to 7.1 percent in 1984.” (http://www.georgetown.edu/users/johnsonj/oweiss/petrod/increase.htm)

“Dynamic forces of oil supply and demand led to all excess supply in world markets since 1980, which in turn led to a de facto decline in the price of oil even before OPEC's London agreement of March 1983 in which the official price was reduced by approximately 14 percent. This oil glut in world markets was the result of at least three mutually dependent dominant forces: high oil prices, increase in production, and reduction in demand.”

(http://www.georgetown.edu/users/johnsonj/oweiss/petrod/since.htm)

“First, following the initial leap of 1973 the price of oil was once again drastically increased in l979. This rise led to a substitution of other sources of fuel and a reduction in real income, which contributed eventually to a decline in the demand for oil after a three-year time lag.”

“A second factor in the oil glut was the increase in world oil production--a predictable economic consequence of rise in its price.”

“A third factor in the oil glut was decreased demand for oil. The 1980 economic recession, which had plagued the world economy and which had markedly reduced the productive capacity of industrial nations by its greatest percentage decline since World War II, was a dominant force in reducing the demand for oil yet further. As their gross national products headed downward because of the recession, industrial nations reduced their imports. This, in turn, led to a reduction in foreign exchange earnings of the less-developed countries. These had, therefore, to curtail their purchases from abroad, including imports of oil. A multiplier effect of all such factors had a marked effect on the demand for oil in world markets.”

(http://www.georgetown.edu/users/johnsonj/oweiss/petrod/since.htm)

DEMAND

Demand for Oil over Time

(http://www.georgetown.edu/users/johnsonj/oweiss/petrod/time.htm)

“A conventional downward-sloping demand curve is not, in [Dr. Oweiss’]opinion, sufficient to explain the interaction of oil prices and quantity demanded over time. In studying the dynamics of international oil markets which differentiates between upward and downward trends in prices. A small rise in the price of oil, from its low, pre-1973 level, will not change the quantity demanded, for demand at such a low level may he regarded as perfectly inelastic.