Using a simple supply and demand framework, analyse the potential Essay

Using a simple supply and demand framework, analyse the potential factors that impact on the price of crude oil in both the short- and long-run - Essay Example Obviously, from the graphical illustration, more is supplied while prices are higher than when they are low. Looking at the demand curve, on the other hand, while prices are high at p1, then quantity demanded is low at Q1. This is unlike the case where prices are lower at p2*, at which the quantity demanded rises to Q2. (investopedia.com, 2011) Some of demand factors as well as supply may have an impact in the short-term while others will be experienced over the long-term. The latest oil price shock has been majorly attached to the demand factors as the driving force especially between the year 2004 and 2008. (Hamilton, 2008) In the short-run there are two experiences that are evident; higher demand levels and an inelastic supply curve. This in turn causes a price upsurge as far as oil is concerned. The reasoning behind this is that as demand escalates, a decline in the stocks of oil is experienced worldwide, in all main oil refineries in the globe. The prices of oil are then forced upwards. This gives a message to the suppliers of oil in the globe to grow their production. However, a hindrance arises since it is not possible to make some extra stock supplies in the short-run. Thus, there will be an escalation of prices as demand shifts against an inelastic supply in the short-run. As one can observe from the following graph, in the short-run some factors of supply can be varied and this leads to an increase in quantity of oil supplied. However, some of the factors that can lead to a further increase are not varied in the short-run, which causes a totally inelastic supply curve at a given point. For a better illustration to this theory, the graph below is of great essence; Demand of oil may shift (increase) from D1 to D2 and then to D3. At the same time, prices may remain at P1 due to the fact that there is enough supply until a certain point where