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Oil prices have steadily decreased since 2014, owing to a surplus of the fuel on the market and a fall in demand. The decline in the United States is being attributed to an increase in domestic demand. As a result of increasing output in the United States, oil imports from the Middle East and Africa have decreased, forcing these countries to compete for other markets, prompting them to lower their prices (Krauss, 2016). Furthermore, oil production in Canada and Iraq has risen, resulting in global oil demand surpluses. Besides, a majority of the automobile companies have resorted to the production of energy-efficient vehicles due to the environmental concerns, thereby reducing the demand for oil.
Fundamentally, market forces play a significant role in determining oil market prices. The recent decline in the oil prices can be attributed to the excess oil supply. Markedly, oil production in the US, Iraq, and Canada has increased, and as companies seek to sell their oil, they have resorted to lowering the prices. Surpluses on the supply end bear detrimental impacts on product pricing (Lin, 2011). Essentially, shifts in supply lead to the distortion of market equilibrium, which culminates in the lack of correspondence between the quantities demanded and the quantity supplied (Heakal, N.d.). Market surpluses can also result from the availability of cheaper substitute products, which attract the price-sensitive customers.
Significant risks are associated with market excesses as the overall result will be low market prices or large stockpiles of unsold product (Econport.org, N.d.). To achieve market equilibrium, bodies that are responsible for regulating the oil market should regulate oil production to mitigate further deterioration of the prices. Essentially, controlling production can ensure that the oil supplied matches the market demand, thereby ensuring the attainment of market equilibrium. When supply matches the market demand, a reasonable equilibrium price is attained and market destabilization is effectively mitigated. An increase in supply without a corresponding increase in the demand distorts the market prices as firms strive to sell their product (Cachon & Terwiesch, 2009).
Cachon, G., & Terwiesch, C. (2009). Matching supply with demand (Vol. 2). Singapore: McGraw-Hill.
Econport.org,. Market Surpluses & Market Shortages. Econport.org. Retrieved from http://www.econport.org/content/handbook/Equilibrium/surplus-and-shortage.html
Heakal, R. (N.d.) Economics Basics: Supply and Demand. Investopedia. Retrieved from http://www.investopedia.com/university/economics/economics3.asp
Krauss, C. (2016). Oil Prices: What’s Behind the Volatility? Simple Economics. The New York Times. Retrieved from http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0
Lin, C. (2011). Estimating Supply and Demand in the World Oil Market. The Journal of Energy and Development, 34(1,2), 1-29.
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