Prices of crude oil dropped from a peak of $147 a barrel in July to below $60 a barrel today. This drop in oil prices has sparked off a price war between, you guessed it, UK’s top four supermarkets-Tesco, Asda, Sainsbury’s and Morrisons. After trying to fill up cash strapped consumer’s shopping carts, they are now trying to fill up their cars. Prices of unleaded petrol fell to just under £1 per litre. The recent fall in the prices is due to the fear that the sharp increase in prices is likely to lead to a fall in demand and hence a fall in revenue.
However, this drop in prices is likely to be short lived. This is because OPEC (Organisation of Petroleum Exporting Countries), a cartel of oil producing nations, announced in the wake of the recent drop in prices that they would cut the production of oil by 1.5 million barrels a day by next month since they fear that their revenue will decrease because of the drop in oil prices. This, they hope, will lead to a decrease in supply and since the demand of petrol is likely to go up due to the decrease in prices, it will ultimately lead to an increase in the price of oil, which some experts estimate to be around $80 to $100 per barrel.
Although it is immoral and unethical, the oil producing nations, in a way, have made a smart move by coming together and working for a common interest, i.e., to make as much money as possible, rather than against each other. Working together ensures that they can control the amount of supply of oil and hence also the price we pay. Oil is by all means almost a necessity which means that the demand is price inelastic; this means that the change in price does not have a huge impact on the level of demand. People still have to fill up their cars to go from A to B, transportation firms still have to fill up their trucks to transport goods and so do buses, trains and airplanes. Also, petrol and diesel have no real alternatives.
However, in a recession, demand is likely to be price elastic, which means that demand is sensitive to the price. So, the move to cut production may lead to a fall in supply, but the increase in prices might also lead to a fall in demand, which would give counterproductive results to what OPEC hope.
Cartels formed by companies are against the law, otherwise we would not have competitive prices and certainly no price wars between supermarkets since they would be busy colluding with each other and fixing prices.
The value of Pound (£) has been falling against the Dollar ($). The benefit of this is that it makes UK businesses very competitive in foreign markets and allows them to import their goods at a competitive price. The flip side of this is that it increases the cost of importing raw materials of which oil is a part. It is likely that even this will increase the price of petrol and diesel we pay at the fuel station.
So, there is no reason to be happy about the drop in fuel prices since it is only temporary and more of a Christmas offer than a real deal.
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2 comments:
thanks for the commentary... I've been researching prices for OIL for the heating of my home and wondering when I should sign a contract plan which would cap the price of OIL/gallon. It seems like I should do that soon given this new news from OPEC. your thoughts?
Thanks for leaving a comment. As for the price of oil for heating, I am not sure about the impact the cut in supply will have on the price. Last month, oil production was cut by about half a million barrels a day, yet the prices kept on falling. Some analysts believe that the cut in production will not greatly affect the price since a increase will lead to a fall in demand.Hope it helps and best of luck.
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