Question

Explain how aggregate supply in an economy would be affected if global supply of oil is disrupted?

300 words

Answer 1

Oil is the crown jewel of goods, from plastics to asphalt to petrol, used in a multitude of ways in our lives. The oil sector is an economic powerhouse and consumers and traders are closely watching oil price fluctuations. Oil price increases will send shockwaves through the global economy. In the price, any step on the production and consumption side of oil is mirrored. Oil is not a gem or caviar, a limited-use luxury commodity that most of us can do without. Oil is ample and in high demand , making its price highly dependent on market factors.

The fundamental principle of supply and demand states that the more a commodity is made, the cheaper it can sell, all things being equal. They're a symbiotic dance. In the first instance, the reason that more has been generated is that doing so has become more economically effective (or no less economically productive). If anyone were to discover a well stimulation system that could double the output of an oil field with just a small incremental expense, then costs would decline with demand remaining flat.

The oil industry is a global game and what is happening in the world has an impact on oil prices , especially as a large proportion of the world's largest oil producers are based in unpredictable regions, primarily in the Middle East. In this area, Saudi Arabia, Iraq , Iran, Kuwait, and Libya have all collapsed. In world affairs, Russia has become a nefarious actor and has faced penalties for being so, and Venezuela is in a diplomatic crisis. The way these countries supply oil, which then dictates how oil prices travel, is affected by terrorism threats, sanctions and other regional matters. If oil will not be supplied by these countries because they are prohibited from doing so, and demand stays steady, oil prices will increase.

There have been a lot of these geographic effects in 2019. The militant attacks on Saudi oil fields, the revived sanctions on Iran, the instability in Venezuela, the bombing of tankers in the Gulf of Oman and the pollution of pipelines in Russia are just some of the international tragedies that have ravaged the oil industry.