Last Updated 04 Jan 2023

Managerial Economics And Prospects of Oil Production

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As it stands today, oil production will be cut by almost 10-percent, as of today’s agreement with Russia (Ciolli, 2020). With the current losses incurred as a result of Russia’s actions, and combined with the corvid-19 outbreak that has nearly stopped all but necessary commerce worldwide, it is critical that OPEC remain in agreement on production efforts. In an effort to thwart this year’s difficulties, it will also be important to be especially civil to the non-OPEC countries, after just today ending a price battle with Russia.

Demand patterns for crude oil in the World. The Crude oil industry is enormous, with Texas and North Dakota produce more oil than any other country (Venketas, 2018). It is also the most traded energy resource in the world, with the demand side factors being guided by the energy needs of various countries, which are still dependent on non-renewable sources. Supply is determined by oil rich countries and ultimately by the availability of oil itself. Oil still appears to be very plentiful, and demand patterns are driven by economic and political measures.

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Price elasticity of demand. Demand is defined as the goods and services people are willing and able to buy during a certain period of time at specified prices, considering that all else is equal. In this case, the demand for gasoline is a somewhat complex calculation. As gas prices go up, demand should go down and vice versa, as the law of demand essentially demonstrates the relationship between the price of a product, and the quantities in which consumers will demand that product. The current push of the last few years comes has been for more energy efficient vehicles, compact cars, and even ultra-compact cars. vehicles. Hybrid electric/gas vehicles are also gaining in popularity, with buyers becoming more environmentally conscious. With the green power movement, backed by some U.S. policies, the elasticity of oil prices has become lessened.

Factors influencing the price elasticity of demand for gas in the US, and possible changes in buying patterns. Price elasticity of demand is the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage of change in the quantity demanded of a product, by the percentage of change in the product’s price (Baye & Prince, 2016, pp. 1–3). Factors that affect price elasticity are the passage of time, luxuries versus necessities, availability of close substitutes, and the portion within a consumer’s budget to afford such things. As of this writing, two critical elements are significantly lowering the demand for oil, the Russia and Saudi Arabian price war, and the fallout of coronavirus.

As of 2017, the CIA estimates on oil consumption has the U.S. at the top, consuming 19,960,000 barrels per day. China is next at using 12,470,000 barrels a day, and India comes in 3rd at 4,521,000 (Central intelligence Agency, 2020). This is an enormous amount of oil use, and the U.S. clearly has the world beat by its demand. This is a result of the country's vast network of federal highways leading to the suburbs starting in the 1950’s. This decentralization was in response to the threat of nuclear attack, and in the cold war era, this was of great concern. As a result, the country has not developed the infrastructure for a national mass transit system, hence our greater dependence on gasoline (Alter, 2016). Some larger cities have widely developed mass transit, but the U.S. as a whole is still far behind Europe in this endeavor.

United States crude oil prices are down 63-percent, and considering that America has become the largest producer of crude oil in the world, this drop deals a substantial blow to the oil industry here (Toy, 2020). The Russia/Saudi price war is causing serious difficulty in the regulation of oil production, and prices have dropped sharply. That, and with commerce nearly coming to a halt for most of the world, oil sales globally will be significantly hurt by years end. Both of these developments are still in the early stages, so little is definitively known as to how this will play out in the long run. Russia and Saudi Arabia did reach an agreement today on production reduction, but with the tumultuous nature of these two countries, only time will tell how well this actually plays out.

Income elasticity of demand for gas and the impact of price changes. When gas prices suddenly rise, it affects how often people travel, how incomes are budgeted, and how and when goods are shipped. Many factors control and determine the prices consumers pay at the pump, but regardless of these, income spent for gas in only elastic up to a certain point. Recreational travel might be suspended to save in this area during a gas hike, but everyone will still need transportation to get to and from work and other appointments and obligations. If the cost of gas goes high enough, people will be forced to budget for it by skimping in other areas, such as for example, possibly cutting the cord on cable television.

Another factor is oil futures, or futures contracts, and are agreements to buy or sell oil at a specific date in the future at a specific price. Traders in oil futures bid on the price of oil based on what they calculate (or hope) the future price will be. They look at projected supply and demand to determine the price. If traders think demand will increase because the global economy is growing, they will drive up the price of oil. This can create high oil prices even when there is plenty of supply on hand. This is known as an asset bubble, and as is the nature of bubble’s, they can burst. Any party who may have a year ago, invested in oil thinking the price today would be higher than it is during this price drop, they will have possibly lost a substantial amount of money. This in turn may adversely affect future oil prices, as they at some point, investors will attempt to recoup these losses.

OPEC was founded in 1960 in an attempt to regulate oil prices. Yet Russia, China, and the United States now produce and export large amounts of oil and are not members of the organization (Chen, 2020). Fracking in the U.S. in recent years has significantly hurt OPEC’s price leveraging abilities. And depending on which political party is in control of the white house at any given time, a green energy agenda may be promoted, or not. The variables in oil production and cost are myriad, however, with such large quantities still required by much of the world, the oil industry will not be disappearing anytime soon. But it has, and will, continue to fluctuate and change.

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