Question

ORGANISATION OF PETROLEUM EXPORTING COUNTRIES- OPEC ( MAJOR SUPPLIERS) VERSUS ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT- OECD ( MAJOR BUYERS) In the short run, both the supply and demand for crude petroleum oil are relatively inelastic. Supply is inelastic because the quantity of known crude petroleum oil reserves and the capacity for oil extraction cannot be changed quickly, as price fluctuates, couple with the indiscipline of some OPEC member countries in dire need for money for development, often exceed their official stipulated quota at whatever world market crude oil price. Thus, inelastic supply Demand by OECD member countries, mainly buyers of crude petroleum oil for energy needs for their advanced technologically driven economic and production systems, so their buying habit do not respond immediately to changes in price. Thus inelastic demand. ( Mankiw, 2018: p104.) Examine with case by case scenario, the other factors responsible for the above stated trend in the world market for crude petroleum oil.

Answer 1

Demand curve of crude petroleum is inelastic because of following factors

1. Petroleum is the chief constituent of energy basket for any country. It is required for providing transportation, electricty and other hydrocarbon compounds (industrial raw material).

2. May of the countries such as India does not have adequate oil reserves and hence are dependent on imports. 80% of the crude oil in India is imported.

3. It has been estimated by various studies that with economic growth accompanied by population growth will put additional burden on known sources of oil.

Inelastic supply of crude oil is because of

1. Limited oil reserves which are mainly concentrated in middle-east region.

2. Capital expenditure required to extract oil is sufficiently high and cannot be altered in short-run.

3. Geopolitical tensions have further exacerbated the stress.

However, recent developments in renewable energy and viable extraction of shale gas has provided alternative to oil as major source of energy. This has increased elasticity of demand for crude oil to some extent. But major breakthrough is required to sufficiently increase the elasticity.