QUESTION 1 (i) Using the figure below, from Murray, J. and King, D. (2012) \"Oil

Question

QUESTION 1 (i) Using the figure below, from Murray, J. and King, D. (2012) "Oils Tipping Point Has Passed", Nature, 481, 433-435, explain the key takeaways and the relevance for today's energy markets (ii) Drawing on relevant literature, is the relationship below an accurate assessment of the oil market? PHASE SHIFT The abrupt change in oil economics can be seen in this scatter plot of production versus price. 140 1998-2004 data #2005-11 data INELASTIC Supply cannot match demand, leading to price swings. 120 100 80. ELASTIC Supply can match demand, modulating prices. 60 Transition point 20 60 62 64 68 70 Crude oil production (millions of barrels per day) 72 74 76 78 80 [10 Marks] Using equations for Pt, N, WIT and F and with the aid of figures show using a storable commodity how prices, rates of production and inventorie:s are interrelated. Clearly indicate the equilibrium position. Using figure:s discuss the role of speculators that buy futures in anticipation (assume they are correct) of a demand shock. [15 Marks]

Explanation / Answer

A

i) Today's energy demand has been inelastic. Because of demand being inelastic suppliers such as OPEC cut production to increase prices. So takeaway is that we must not reduce consumption of crude this will help in reducing dependence on oil producing companies.

ii) Yes, relationship is true because with elastic demand price won't change much as people can switch to other sources. But with demand being inelastic price would rise on fall in production because there are no substitutes available.

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