Demand and Supply of Petrochemical Products

Question: Discuss about theDemand and Supply of Petrochemical Products. Answer: Introduction: Oil (petroleum) is one of the valuable natural energy sources in the world. The introduction thus must talk about how scarce it is. Other than being used as fuel for energy and transport, it is also used for creating petrochemical products. Petrochemical goods, such as plastic, appliances, solar panel, automobile parts, bullet proof vests and others utilize roughly 5% of worlds annual supply of oil. Arguably, the modern oil era started from 1901. The consumption of petroleum was mostly dominated by fuel users before that. In the long run, oil faces a demand curve almost as elastic as a life-saving drug. Its abundance and high demand make its price a crucial driving force in an economy. The increasing number of oilfields can hardly compete with the growing demand faced by the petroleum market. Currently, demand for crude oil is around 90 million barrels per day, which is four times of the discovery rate of oil reservoirs (Ji and Fan 2012). The United States is the biggest oil consumin g country, followed by China, India, and Japan. Russia, Saudi Arabia, United States of America, Iraq and China are the first five countries in the list of highest oil producing countries. Demand and Supply of oil is a more complex concept than that of any other goods. The idea of demand and supply is used to find out the equilibrium price of a commodity. Theoretically, if the demand for a good increases or supply of the good decreases, the price of the good increases. Again, a drop in the demand for that good or the increase in the supply makes the price of the good go down. This whole process takes place at the same timeframe (Bowen and Sosa 2014). This is how the market mechanism works for most of the common goods (Cashin 2014). In the case of oil, the present price depends on the future price of oil, at a certain predefined period of time. This mechanism takes place at the Oil futures market. Oil futures contract binds the supplier and the consumer to make a transaction under its regulations. This mechanism helps the operating individuals of the market to lock in an agreeable price which minimizes the risk of a financial loss. Two types of future traders are presen t in this scenario, hedgers and speculators. Hedgers are those traders, who trade a futures contract to protect himself from price changes in his product, in future. Speculators are those who use futures contract as an investment in the stock market to earn a profit. They buy a futures contract, whose price they expect to rise in the future and sell the contracts when the price is likely to fall. The increasing population results in increasing demand for vehicles. More vehicles require more units of fuel, which directly or indirectly comes from petroleum. The growing rate of the population also increases the requirement of petrochemical goods. Hence, it can be said that, the demand for oil is rising with the steep increase in population and that they are positively correlated. The number of consumers is much bigger than the number of suppliers in the petroleum market. It leaves the consumer side of the market with very little power to influence the market price, unlike producers. Sa udi Arabia, producing thirteen percent of the total oil production, currently ranks one in the table of top oil producing countries. The United States of America is the 2nd top oil producing country, producing twelve percent of the total oil production. Seasonal changes in weather also affect the demand for petroleum in most of the countries. For example, in winter more hitting oil is used by people, which is not the case in summer. Oil is sold and bought in world market using US dollars. Therefore, a change in the exchange value of dollar plays a huge role in determining the demand for petroleum. If the value of US dollar depreciates the demand for oil and petrochemical goods will increase, vice-versa. The process of oil extraction, supply and oil wells position in the map also play huge roles in determining the price of petroleum in a country (Anandan and Ramaswamy 2016). The price of oil in Australia is arguably rising more than that in the countries which are closer to the oil p roducing countries due to the adding cost of carrying the petroleum from countries like Russia, Middle East, and South East Asia, etc. Supply of oil can be affected by various reasons. For example, political unrests between countries might change prices of petroleum and petrochemical goods (Hou, Mountain and Wu 2016). After the Ukraine issue, Russia has disrupted trade with the European Union and Australia. The Brexit issue made oil trade more costly for Australia. Supply of oil also depends on OPEC (Organization of Petroleum Exporting Countries). It is a consortium of 13 oil producing countries, which are Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the Arab Emirates and Venezuela. 40 percent of worlds petroleum production is monitored by these member countries. Figure 1. Demand and supply for OPEC Source As created by author The above figure is showing the demand OPEC was facing in the year 2015 and 2016s 2nd quarter along with the aggregate supply. Oil speculation drives the investors to purchase or sell futures contracts which influence the market demand and supply of petroleum. In the year 2008, people thought speculators were buying more contracts (Kilian 2014). It led to a hike in oil prices ($140/barrel). The price fell to $30/barrel by the end of 2009 due to the rise in price, which was not backed up by an appropriate amount of demand. Recently, developing countries like China and India are demanding more petroleum which is affecting the global market for oil (Reboredo 2012). Conclusion: There are various other reasons which also play their respective parts in determining the demand and supply of oil like taste and preferences of the consumers, culture, GDP of a country, other natural resources present, etc. Oil is a scarce resource, which has a limit and can end in future. The rate of exhaustion is greater than the rate of discovery of new oil wells. All these reasons suggest that there will always be a gradual increase in oil price. But in reality, short run shocks are playing significant roles determining the price of petroleum and petrochemical goods. It increases, as well as decreases the price of oil over time (Peersman and Stevens 2013). 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