You have no idea how my pocket flinched at the news of increase in fuel prices. (see the notice by ERC here). I literally frowned as I imagined queuing at the chaotic bus stands to avoid the rumbling belly of my petite car. Why do these fuel prices keep going up and in the same rhythm come tumbling down? Why is it that sometimes everyone seems to be hurriedly dashing to fuel stations and in other times station owners are desperately investing in ‘happy’ franchises to attract more customers? Even the non-car owner, the one using public transport is directly affected by the fluctuating fares that usually don’t come down after significant upsurges. What exactly is the game? Or is there a plausible theory?
So I brushed through a couple of articles on the volatility of oil prices and whoa! it took me back to the fourth of nine rows of our 20xx macroeconomics class. The demand, supply, and price elasticity curves, that gave me a really hard time in year One of campus, suddenly begun to make sense. (looking forward to the day I will say the same for parallelograms!)
The theory. Positive shocks would be as a result of increased production from OPEC (Organization of the Petroleum Exporting Countries) as well as non-export oil-producing countries. The increased supply in oil would automatically lower its prices. However, if any of the quotas of these 13 countries (Nigeria, Algeria, Libya, Angola – just to proudly mention the current African member states) are curtailed in the sense of production or political issues, then prices automatically go up due to increased demand for oil. Negative shocks would result from significant decline in demand. Case in point – China. When such a large economy experiences severe downturn, the whole world cries because this very large customer is unable to buy in its unusually large quantities.
The games. In a monopoly (one seller/producer for a product), no competition exists and so the company can demand any price it from its customers for this precious commodity. For duopolies, the two companies have to work in a way that they balance their margins and market share else they can easily find themselves at the mercy of the consumer. The real games lie with oligopolies such as the OPEC cartel because the real power (pun intended) lies at their feet. And the more power an OPEC member state wields, the greater its political influence. Some theorists argue, though, that cartels help regulate the volatility present in every commodity market. Well I don’t know about that, all I remember is that some of us really suffered from the cartels that happened at the University library.
PS: Did you know that chewing gum, crayons, lipstick, sports equipment, and wrinkle-resistant clothes are made from petroleum (by) products?
Guest post by Tesha Mongi (visit her blog)