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When it comes to oil, what are the other factors that might influence supply and demand...

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sj83 | Valedictorian

Posted July 16, 2013 at 12:37 PM via web

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When it comes to oil, what are the other factors that might influence supply and demand other than price?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted July 16, 2013 at 1:08 PM (Answer #1)

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First of all, please note that it is not technically correct (as can be seen in this link) to say that price can affect supply or demand.  Price affects the quantity supplied or demanded, not the supply or demand itself. 

That said, there are many things that can affect the supply and the demand of oil.  The factors that affect demand will be different from those that affect supply.

The main determinants of supply that apply to oil are:

  • The price of inputs.  If machinery for extracting oil becomes cheaper, the supply of oil will increase.
  • Technology.  If new technology allows oil to be extracted from deeper deposits, the supply of oil will increase.
  • Taxes and subsidies.  If the government subsidizes oil exploration and extraction, the supply of oil will increase.
  • Geopolitical factors.  This is not a typical determinant of supply, but it does apply to oil.  A lack of stability in areas with oil (for example, war in the Middle East) can drastically reduce the supply of oil.

The main determinants of demand that apply to oil are:

  • Price of complementary goods.  As the price of things that need oil (in particular, cars) drops, more oil will be demanded.
  • Consumer tastes.  If consumers turn more to things like electric cars because they are concerned with the environment, the demand for oil will drop.
  • Number of consumers and consumer income.  As more people in the “developing world” come to have more money, they will want to have more goods.  This will cause the demand for oil to increase.

These are the main factors that could affect the supply of and demand for oil.

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