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Crude Oil Price & Supply Patterns

The inability of economists to correctly predict crude oil price and supply patterns during the Arab oil embargoes in the early-1970s raises questions concerning the probable behavior of crude oil price and supply patterns in the 2005-2007 period. Two questions are relevant. The first question requires an explanation of why price and supply patterns were not predicted with greater accuracy in the early-1970s. The second question involves the implications for the 2005-2007 period of the 1970s experience.

A causal loop diagram related to the crude oil market in the early 1970s is presented on the following page. Most of the data reflected on the Causal Loop Diagram indicates that prices for crude oil should have fallen and supplies of crude oil should have increased following the end of the oil embargoes, and these outcomes were predicted by most western economists. Western economists assumed that the embargoes were simply manifestations of political disagreements. Perhaps political issues did provide the initial motivation for the oil embargoes; however, the Organization of Petroleum Exporting Countries (OPEC) member states soon realized that the crude oil reserves under their control had a greater future value than present value, and that future value would be enhanced by leaving the oil in the ground.

At the time, the Arab oil states could provide for the relatively low expectations of their populations with the revenues derived from higher prices and lower volume. Thus, both demand-loop and supply-loop pressured crude oil prices to remain high, as indicated in the diagram below.

A similar crude oil outcome is likely in the 2005-2007 period; however, the underlying reason is different. In 2005, globalization of economic activity has led to substantial economic growth in China and India, which together account for approximately 30 percent of the world's population. The demands for energy, especially crude oil, by t

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Crude Oil Price & Supply Patterns. (1969, December 31). In LotsofEssays.com. Retrieved 01:58, March 19, 2024, from https://www.lotsofessays.com/viewpaper/1705669.html