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Economics for Business
Submitted by Names
Scarce Resource: Oil Industry
The soaring price of oil in the international market is a clear indication that crucial natural resource has reached a period of acute scarcity (Deming, 2003). The IMF analysis that was carried out in 2012 in the oil industry showed that the price of oil will double in 2022 about $180 per barrel. The scarcity of oil is mainly contributed by massive increase in demand that has surpassed the supply (Riddle, 2012). The increase in the scarcity of oil is generally associated with rising world population, increasing global wealth, and high rate of urbanization. Despite rising demand for oil, the supply has been decline, which has led to oil crisis in different parts of the world (Watkins, 2006). The demand and supply of oil is inelastic in the short run, but they are elastic in the long run. Some of the solutions that are being used to correct the scarcity include the use of renewable resources, energy efficient products, and lighting controls. The main substitutes for oil, therefore, include nuclear power, solar energy, and wind energy. The paper focuses on the economics of oil scarcity by analyzing the market forces and other factors that are making factors that are making oil to be scarce.
Demand and Supply of Oil
Like any other resource in the world, oil is taken to be scarce when its demand is far much higher than the supply, which leads to an increase in price (Busch, 2005). In the case where the supply cannot meet the demand in the available market prices, the prices must increase above the normal price to motivate more supply and to ration demand. Therefore, oil scarcity is reflected on the market price. In addition, the rise in price indicates the opportunity cost of supplying more oil in the market (Helbling et al., 2011). The relationship between demand and supply of oil in the global market shows that it is scarce.
There are a number of factors that have led to an increase in demand for oil in the international market. An increase in population is the main factor that has led to an increase in demand of oil (Fattouh, 2007). The current world population is about 7.4 billion and it is expected to reach 9 billion in 2050. As a result, there has been a massive rise in the consumption of oil because it is the primary source of energy. The second factor that has led to a rise in demand for oil in is the growing global wealth, especially in the emerging economies like China, India, and Brazil (Holland, 2013). According to International Energy Agency (IEA), China is the largest consumer of oil due to its rapid GDP growth (Unglesbee, 2013). The growth of global wealth has also led to an increase in the number of middle class whose numbers are expected to reach 3 billion by 2030. The middle class are believed to consume a lot of oil, as they buy many automobiles and other electric devices that heavily rely on oil.
In addition, urbanization is another main factor that is causing a massive increased in the demand for oil (Canavan, 2014). By 2012, the global urban population was estimated at 3 billion and the number is expected to rise to 5 billion in 2030. Urban population always demands for quality goods and services and conveniences that will accelerate the use of urban critical resources (Ilie, 2006). Besides, urban dwellers have relatively high income, which they can use to consume a lot of oil dependent products like vehicles. Therefore, increased urbanization and income have led to a rising demand for oil in the global markets, especially in developed and emerging economies.
Elasticity and Supply of Oil
Oil has a relatively inelastic demand and supply, which shows that a change in price has no significant effect on the quantity demanded or supplied to the consumers. Consumers of oil make no effort to consume less effort due to their consumption habits (Brandta et al., 2013). They may complain about oil prices, but they do not change their consumption behaviors. Therefore, in the short run, a change in price of oil does not significantly affect its demand and supply. However, in the long run, the demand and supply of oil becomes elastic and can chance consumers’ consumption habits.
Addressing Oil Scarcity
In order to reduce the scarcity of oil, the world is now moving towards the use of renewable resources, championing for the use of energy-saving products, and other lighting control devices. Many people across the globe are now using renewable resources such as solar and wind to conserve the scarce resource that is facing the threat of depletion. The world is also championing for the use of energy efficient products like bulbs with CFL and LED that saves energy (Countries, 2009). Automobile industry is also encouraged to manufacture fuel efficient vehicles and electric automobiles. In addition, lighting controls such as integrated lighting controls are being used to conserve oil.
As a result, some of the substitutes of oil include nuclear power and solar wind power. Many of the developed countries like the USA are now consuming a lot of nuclear power (Akpan and Nnamseh, 2014). For instance, the US has about 99 nuclear power reactor that provide about 22% domestic electric outputs. France also generates 80% of its electricity through the use of nuclear. Solar and wind power are also used as source of renewable energy. Therefore green energy is the main substitute of oil because they produce clean energy that also helps in the conservation of the environment (Cleveland, 1993).
Oil is considered to be one of the scarce resources in the world due to its increasing prices. The increase in price shows that the demand for oil is higher than its supply. High rate of world population growth rate, increasing international wealth, emerging economies, and high level of urbanization are some of the factors fueling the demand for oil. Therefore, in order to solve the problem, the world is now consuming more of renewable energy and energy saving products than before the oil crisis hit the globe. Nuclear power and solar and wind energy are some of the major substitute for oil.
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