The Price of Oil Case Study

Business Econimics

The price of oil case study

1 - Describe how the oil price has changed since 1960. Identify in particular the extent to which the current oil price is exceptional. (One factor which is not considered in the case study is the affordability of oil. You could measure this by comparing the oil price to average income levels – These statistics are to be founded in the appendices and in the excel spreadsheet on the blackboard site.)

The rise in petrol prices is largely down to the cost of crude oil. From 1960 to early 1970s the price of oil was considerably lower than to date. During those years costing around £0.004 per litre, in the first oil price shock of 1973 the price rose rapidly peaking in 1979. The second oil shock increased the price to a peak of £0.136 in 1984. In 1986 the real price of oil fell sharply and remained low until the 1990s. It was in 2000s that the oil prices started rising once again, and it had exceeded its 1984 peak price by 2005. In the first half of 2008, the price of oil was exceptional reaching a record peak of $147.27 per barrel on July 11th; it has never risen so fast since 1979. According to the AA, the UK is not the only country to suffer from rising petrol prices. Research confirms that overseas prices have also risen. However, the UK has the tenth highest unleaded price and the second highest diesel price in Europe.

Although the price of oil is high, taking into account the growth and decline of other product's price, it is clearly noticeable that the real price of oil has risen more slowly than other prices in general; therefore oil has become more affordable. In 1960 the real price of oil was £0.074 per litre, and the average income in the UK was £496. In 2006 the real price of oil was £0.227 per litre and the average income in the UK was £1351. This shows that it was cheaper to buy oil in 2006 than it was four decades ago. However, since last year the real prices of oil have raised again. Its affordability is lower than in past times, therefore it can be concluded that oil prices are currently exceptional – not only for being so high, but also for not being as affordable as in the past decade.

Source: WTRG Economics

2 - Why has the demand for oil been increasing?

There are some factors which have directly influenced the increased demand for oil such as the price of oil – the lower the price the greater the quantity demanded. Even though the oil price has risen recently its demand is still high due to not having any cheaper alternatives, but in a long term this might change, the price of complementary products – Currently the high price of energy sources (e.g. - Natural Gas) limits the