DSME 6010 W

Managerial
Economics

Case Presentation

THE GLOBAL OIL PRICE:

DEMAND SIDE VS. SUPPLY SIDE
FACTORS
G ro u p M e m b e rs:
Anup Mandvariya Bowen
Lu
Hang Li
Harry Wu
Hualing Zheng
JoJo Wu
Tarasha Bhasin
Vivek Avari
 Introduction
Three hard truths will shape the future of
the energy system

•Surge in energy demand

•Supply will struggle
to keep pace
•Environmental stresses
are increasing
 Introduction

Oil : the major primary energy source

World Primary Energy Demand

2 0 ,0 0 0
Mtoe

1 5 ,0 0 0

1 0 ,0 0 0

5 ,0 0 0

0
1 9 80 2 00 0 2 00 6 20 1 5 2 0 30

O il C oal Gas B io m a s s N u c le a r H yd ro O th e r re n e w a b le s
 Introduction
Distribution of Proved Reserves
 Introduction
Crude Oil Prices
 Introduction
Easy oil is finished
•
• New technology increase the oil
production cost: Deep water oil; Oil
sand
• Strict rules for oil industry: BP
accident; Low carbon
requirement(carbon capture &
storage)
• Currency change rate and Interest
rate: QE2

 Introduction
US dollar index & Oil price

Oil price US dollar Index

($/barrel)
 Demand Side Factors
Region wise consumption: The industrialized nations are the largest consumers
 Demand Side Factors
 Most regions use more oil for heat
and power than for
transportation. 

 There is a swing in consumption
during winter.
Demand Side Factors
 Demand Side Factors

 Demand for crude oil is derived

demand as well.
 Prices of substitutes serve as a
determinant of price.
 OPEC estimates for global
consumption.
 Demand Side Factors

 In the short-term, demand for crude

oil may be mismatched.

 In the longer term, alternatives
can reduce crude oil demand.

 Demand Side Factors

The world is facing a decline in

discovery of new deposits of petroleum.

A decline in production caused by the
depletion of present resources.
By 2010 the demand and supply gap
would increase by 2 million barrels per
day.(Source: IEA)
 Supply Side Factors
v Terror premium
• an estimated extra $10 per barrel on price
• uncertainty to supply

 Supply Side Factors


v Faster Exhaustion Rate Than Discovering Rate

 We consume three times more oil than we discover. We are living
on borrowed time.


Oil Discovery Versus Oil

Consumption
 Supply Side Factors


vIn ve n to ry m a n ip u la tio n

A fe a r th a t th e o il p rice w o u ld cra sh d o w n
m a in ta in sta b le p rice b y ke e p in g lo w o il
in ve n to ry
 Supply Side Factors
v Unconventional Sources of Oil
 Extraction is financially unfeasible

 Supply Side Factors
• To conclude, due to the supply-side factors, the global oil
supply remains relatively constant compared with the
increasing demand. Therefore, global oil price will increase
as the demand rises.


•
•


Source: http://omrpublic.iea.org/
 Conclusion
• Short-Term impact on Supply and
Demand Curves
– The rise of emerging markets has also
changed the supply and demand
dynamics. The demand increases and
the curve moves to the right. For any
given level of price, more oil is
demanded and price rocketed
 Conclusion
• Short-Term impact on Supply and
Demand Curves
– Because OPEC supply so much of the
world’s oil, any restricting of supply
by OPEC causes the blue supply
curve to move to the left, and the
price rocketed.

 Conclusion
• Long-Term impact on Supply and
Demand Curves
 Over the long-term, high oil prices will tend
to encourage consumers to either reduce
energy consumption or shift to other forms
of energy. Similarly, investment in either
inhospitable areas or in developing
technologies will result in greater quantities
of oil or synthetic crude coming on to the
market.

 Thus demand will shift to left (decrease) and
supply will shift to right (increase) leading
to drop in the price.

 However, short-term impacts will be effective