CONTENTS

INTRODUCTION

RESOURCE OIL AS SCARCE COMMODITY

OIL – HOW TO PRODUCE PROBLEM

PRICE MECHANISM – WHAT TO PRODUCE

OIL – FOR WHOM TO PRODUCE

OIL – DEMAND AND SUPPLY

OIL – SUBSTITUTES AND THREATS

CONCLUSION

REFERENCES

INTRODUCTION

Oil is a commodity used in various industries and with numerous end uses, and its prices fluctuates due to supply and demand. Until 1973, petroleum had a lower price and the supply was higher than demand, after a cutback on its production, the price dramatically increased, and it became scarce since then. With a lower production and higher prices, industries that usually depend on oil, start to seek other alternatives for this resource, for example, use solar energy, or design smaller cars than use less fuel.

Analysing the data from the past 20 years, demand and supply for oil has been progressively increasing. Transport and equipment industries are responsible for the demand and producing countries for the supply and also controls price. Even with technology moving forward and developing new petroleum substitutes, oil still necessary to major industries and short-term alternatives are rare.

RESOURCE OIL AS SCARCE COMMODITY

Oil is used for an extensive range of goods and services, including, plastic products and clothing, also, for transportation, heating and industry. This resource is considered a scarce commodity due to its natural reserve. Even though technology is advancing, oil still one of the most important raw products in the world, and its availability is limited. The exploration is increasing, but scientists and the industry have not been able to discover more oil reserves, and the reserve amount is falling over time. If the demand keeps increasing, with no restrictions, in the long run, petroleum will be an issue, since the product is used in the majority of industries (Banks, 2001).

OIL – HOW TO PRODUCE PROBLEM

The price of oil was low before 1973, since there was enough supply compared to demand. After this year, the Organization of Petroleum Exporting Countries (OPEC) decreased petroleum supply, and the effect was a significantly increase in price.

Since oil is a non-renewable resource, when oil prices rise, the industry tries to use less of this product, and starts depending in other kinds of energy resources. For example, chemical companies switch to alternatives for oil input, smaller and more efficient cars are produced, and, the use of solar energy increases. With these changes, OPEC protects oil, while the world develops replacements to petroleum use.

PRICE MECHANISM – WHAT TO PRODUCE

Even when the oil price increased between 1973 and 1980, it decreased in middle 1990s; the reason why price fluctuates is that companies and customers had to change what to produce and to purchase and find alternatives to the use of oil. On the company side, the need to find other kind of energy, or create new chemical energy or even use more fuel-efficient aircraft are ways to solve this problem. As a customer, choose to drive less, or use cars that are more efficient and demand less oil, and even install better insulation in the households are some alternatives to solve this issue. Even though technology grows quickly, and oil substitutes are started being produced, petroleum still the main product from industries.