Assignment Two: Article Analysis
1. This assignment is due in week 6 and is worth 25% of your overall assessment.
2. You need to submit this assignment via Learnonline Gradebook.
3. The word limit is 1000 words.
4. Provide adequate referencing. Check this site for how to cite properly (http://roadmap.unisa.edu.au/). Failure to cite properly is evidence of academic misconduct and will result in marks being deducted or even 0 mark for the whole assignment in serious cases. Instructions:
Read the article titled “Why the oil price is falling” (Source: The Economist, Date: Dec 8, 2014) and provide the analysis for the following statements in 3 different sections.
1. Use demand and supply models to illustrate what determinants have led the plummet of oil price. Make sure that you articulate the impact of the following factors: a. summer season; b. OPEC’s decision to maintain the output; c. Slowdown of world economy; d. technology advance in improving fuel efficiency and developing alternative fuel; e. increase in production in America. (7 marks)
2. Discuss the determinants of the price elasticity of demand for oil, and explain whether demand and supply for oil is elastic or inelastic. Based on your discussion of elasticity, illustrate the effect of price drop on the total revenue of a typical oil producer. (7 marks)
3. Assuming that the government has decided to intervene and introduced a floor on prices. Illustrate the likely impact of such government intervention on the market. Conclude your analysis with comments on the benefits and drawbacks of the government’s price support policy. (7 marks)
Your assignment will also be assessed on how effective you can communicate with the reader; i.e. how well you have presented your arguments and ensured your analysis is logical and consistent. Consequently, 4 marks will be awarded for effective writing including proper grammar, referencing and formatting. Importantly, make sure you use appropriate diagrams in your analysis.
The Economist explains Why the oil price is falling
Dec 8th 2014
THE oil price has fallen by more than 40% since June, when it was $115 a barrel. It is now below $70. This comes after nearly five years of stability. At a meeting in Vienna on November 27th the Organisation of Petroleum Exporting Countries, which controls nearly 40% of the world market, failed to reach agreement on production curbs, sending the price tumbling. Also hard hit are oil-exporting countries such as Russia (where the rouble has hit record lows), Nigeria, Iran and Venezuela. Why is the price of oil falling?
The oil price is partly determined by actual supply and demand, and partly by expectation. Demand for energy is closely related to economic activity. It also spikes in the winter in the northern hemisphere, and during summers in countries which use air conditioning. Supply can be affected by weather (which prevents tankers loading) and by geopolitical upsets. If producers think the price is staying high, they invest, which after a lag boosts supply. Similarly, low prices lead to an investment drought. OPEC’s decisions shape expectations: if it curbs supply sharply, it can send prices spiking. Saudi Arabia produces nearly 10m barrels a day—a third of the OPEC total.
Four things are now affecting the picture. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.