Economics Commentary 1

Rita Lencastre Lencast re Bernardo Economics SL <---> Mr. Bryson/Mr. Singer Economics Commentary 1

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Commentary on the article: Oil prices rise as inventories fall

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Source of Extract: http://news.smh.c http://news.smh.com.au/breaking om.au/breaking-news-business/o -news-business/oil-pricesil-pricesrises-as-inventor rises-asinventories-fall-20101111-17o3t. ies-fall-20101111-17o3t.html html Date of extract: Thursday, 11 th November 2010 Word Count: Overall 1271, Actual commentary 748 . Date the commentary was written: Friday, 12th November 2010 Section of the syllabus: 2.1 (Microeconomics  Markets)

By: Rita Lencastre Bernardo

1 Picture taken from:

http://www.treehugger.com/oil.pump.500.jpg on Sunday, 14th November 2010 Oil

Rita Lencastre Bernardo Economics SL <---> Mr. Bryson/Mr. Singer Economics Commentary 1

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Article:

Oil prices rise as inventories fall November 11, 2010

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AP

Oil prices hit a new two -year high on Wednesday, after the US government reported crude and petrol stockpiles declined last week. The Energy Department said on Wednesday commercial crude oil inventories fell by 3.3 million barrels to 364.9 million barrels for the week ending November 5. Natural gas inventories held in underground storage in the lower 48 states increased by 19 billion cubic feet to 3.840 trillion cubic feet for the week ended November 5. Advertisement: Story continues below

The report sent benchmark oil for December delivery up $US1.09 to settle to $87.81 a barrel on the New York Mercantile Exchange. Natural gas prices, meanwhile, fell 16.4 cents, about four per cent, to $4.046 per 1,000 cubic feet. The amount of oil in storage remains above the average for this time of year, yet the price is now at its highest level since October 2008, when the global financial crisis was taking hold. Oil prices have risen about 10.6 per cent this year, while crude supplies have increased by 11.5 per cent. Natural gas prices had been dropping as supplies increased, though recently they've risen as the winter heating season approaches. The government also said petrol inventories declined by 1.9 million barrels to 210.3 million barrels while demand over the past four weeks was up slightly, averaging 9.1 million barrels a day. That's an increase of 1.8 per cent from the year -ago period. In addition, inventories of distillate fuel, which include diesel and heating oil, fell by five million barrels, or three per cent, to 159.9 million barrels. Oil prices have climbed steadily in recent weeks because the dollar has weakened against other currenci es, largely because of the Federal Reserve's decision to pour billions of dollars into a bond -buying program to stimulate the US economy. Since oil is priced in dollars, a weaker dollar makes it more of a bargain for buyers using euros or other currencies. Energy traders expect this to happen, so they buy oil

Rita Lencastre Bernardo Economics SL <---> Mr. Bryson/Mr. Singer Economics Commentary 1 when the dollar falls, boosting the effect.

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Yet, oil was higher on Wednesday, even though the dollar was stronger as traders concluded the inventory decline was a sign of an improving economy. "The trend in crude supplies has been down now for more than a couple of months," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "That's beginning to give us a glimmer that the economy is on the rebound." In other Nymex trading i n December contracts, heating oil added 3.52 cents to settle at $2.4419 a gallon and petrol gained 5.12 cents to $2.2362 a gallon. In London, Brent crude added 63 cents to $88.96 a barrel on the ICE Futures exchange.


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Actual Commentary: The article chosen seemed extremely interesting when looking at section 2 of the IB Economics Syllabus, Microeconomics. More precisely this article fits into Markets, sub-section 2.1. The article states a difference in inventory and a price change along the products as the inventories were changing. This shows that as a supply may change the price also changes. This change will then create a third change in Demand. The law of supply states that a higher quantity of a product will be supplied at a higher price. Supply looks mainly at the point of view of the seller. So if youre selling at a higher price youre willing to sell more, that way youre profit will increase. When working with a graph that has only a supply curve you will notice that as the point goes higher on the supply curve the price and the quantity supplied will both increase:

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So when you combine demand and supply, instead of considering just the supply curve, you have to consider also the demand curve, which will alter the

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Made in iPaint, by me, as I dont know how to work with Microsoft Word for Mac to make diagrams like these.

Rita Lencastre Bernardo 13 GEN Economics SL <---> Mr. Bryson/Mr. Singer Economics Commentary 1 way you work around a graph, because when working with demand and supply youre considering the side of the costumer and the seller.

This article looks at both sides. We learn that there is a decrease in the number of barrels in the inventory changing from 368.2 million barrels to 364.9 million barrels (a decrease in 3.3 million barrels). This shows a decrease in supply, which will immediately affect demand. Because the seller doesnt have the same amount of product to sell, fewer people will be able to have the product. When this happens companies/sellers, tend to increase the price, so there will be less demand, because the higher the price is, fewer people will be able to purchase it. This is stated in the article when says that in December there will be an increase of $US1,09, changing the price from $US86.72 to $US87.81 Oil prices have risen about 10.6 per cent this year . The graph below represents the statements made above:


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The graph above puts into figures what is said before. This graph also proves that to be a balance with the new quantity of oil there is in the inventory there will have to be an increase in price, so the company doesnt end up with a shortage. Also this way, companies are able to maintain the levels of profit they would have selling more, by raising prices. What may cause a shift to the left in the supply curve? There are several aspects that may cause a shift: Factors of production, technology, and climate changes. In this case there was a shift to the left, which means a shorter supply. The factors of production (land, labor, capital and entrepreneurship) may cause this change as the economies all over the world are suffering in a negative way, there will be less money to put up for labor, and therefore there will be less people digging for oil. Capital may also be a factor of production that affects, because as it happens with labor, there is less money to invest, so oil companies cant buy parts or invest on other oil holes to look for more. Climate changes can also be a very big factor for this shift, because as the seasons turn, storms will come, and that will make the job harder. On the other hand, there is an increase in supply for natural gas inventories, which increased by 19 billion cubic feet to 3.840 trillion cubic feet, by the same time the inventories for oil decreased. Though it hasnt been stated the decreased values in price for natural gas, the article says that prices dropped as supplies increased. This shows an increase on the supply curve:


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This graph, that shows an increase on supply (therefore a shift to the right), shows that the higher the quantity supplied, the higher the price will be in an equilibrium point with demand. With this article we have looked at the supply. How a decrease or an increase in supply may affect the supply curve when against the demand curve. The article says that prices had been dropping as supplies increased , for the natural gas, and the exact opposite happens with the oil supplies. This shows how different the supply curve works for when youre looking just from the companies point of view, or when you have to balance both the companies and the buyers point of view.

Economics Commentary 1

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