Analysis of the Business Environment - Oil Prices Coursework

Analysis of the Business Environment - veget competent oil Prices - Coursework Example there be a number of intrinsic features of cover cater and demand that are significant to all study of unadulterated anele price instability. Important features encompass competing price and income elasticity, a bifurcated and difficult supply response, variable data quality, single currency prizing and the interaction of multiple refined oil yield market with discrete elasticity of supply and demand. Consequently they do have a shock on elasticity of supply and demand and can have an impact on the wide-ranging elasticity of the crude oil market (Williams 1996). It is generally understood that OPEC (organization of petroleum exporting counties), has the biggest oil reserves in the world, and is accountable for most of the supply and pricing of petroleum products. OPEC is a permanent intergovernmental organization which at present consists of 12 oil producing and exporting countries, as mem bers spread across three continents of America, Asia and Africa (Taylor 2006). The 12 members states of OPEC are Algeria, UAE, Angola, Qatar, Ecuador, Kuwait, Iraq, Libya, Nigeria, Saudi Arabia and the Islamic Republic of Iran. Causes of Short Run Price Movement of Oil Global oil prices have more than tripled since the year 2003, and volatility has become the rule rather than the expectation. The market price of oil is volatile in the short run. This is because of the following causes 1. The price elasticity of supply The price elasticity of supply is a measure used to measure the connection between the swop in quantity supplied and change in price (Kellick 1995). If supply is elastic, producers can raise output without rise in cost or magazine delay. If supply is inelastic, firms find it hard to alter output in a given item of time. The price elasticity of supply is equated to the Percentage change in quantity supplied divided by the percent change in price When the result of t his is More than one, and then supply is elastic, Less than one then supply is price inelastic, Zero, then supply is preferably inelastic and When the result is infinity supply is perfectible elastic following a change in demand. Factors That Affect Price Elasticity of Supply of Oil Several factors affect the price elasticity of supply of oil, these are a) The spare production capacity- the spare production capacity of oil have reduced over the years, this has been one of the major reason for the rapid change magnitude in the prices of crude oil. When there is spare capacity, businesses can expand output easily to meet cost increase demand pressure on cost (Wakeford, 2010). However, when this spare capacity lacks then the business cannot be able to increase production and would mean that the high prices will persist due to the scarceness of the commodity (Clo, 2000). b) The detail involved in the production process when supply is more price elastic the longer the time period th at a firm is permissible to adjust its production levels. In some markets for example in agricultural markets, the quick supply is fixed and is determined generally by planting decision make mouths before, and also the climatic condition, which have an effect on the overall production (Gibbs 2010). c) Factors substitution possibility-when factors substitution is achievable at low cost, then supply will be elastic. When factors are highly specialized as in our case here then