Article Report: Task 2
23/11/2011 § Leave a comment
1. What is the “questions” (or “problem”)?
- Try to focus on ONE issue (e.g., demand, trade off)
- The oil industry is going haywire because the oil companies and suppliers are not the ones in control – the speculators (investors) are the ones who have control over the industry.
2. What are the key terminologies and concepts? (Define them.)
- inelasticity – when a change in a good’s price has little to no impact on the supply or demand
- inelastic supply – when a change in a good’s price has little impact on the quantity supplied
- inelastic demand – when a change in a good’s price has little impact on the quantity demanded
- Who are the:
- Stakeholders –
- Oil companies (workers, CEOs, major figures in the oil industry) are stakeholders in that their jobs will be a lot harder when the prices of oil increase or decrease.
- The public are stakeholders in this situation as they are mostly the ones who use the oil; oil that is mined mainly goes to the public (who is simply the rest of the world and not specific oil industry individuals.
- Winners –
- Economists can either win or lose; they get more to speculate and analyse; also more information to use to predict for the future. Lots of data in this situation for them to work with.
- The speculators in this situation can win – according to the article, “…proof that speculators are still in control,” which signify that the oil suppliers are apparently not the ones in control of the flow of oil to countries/customers that require it. They are gaining the most money out of this situation. At the same time, some unlucky speculators can be the losers as they obviously lose some money out of making the wrong investments.
- Speculators – someone who invests in stocks, properties, or other ventures in the hope of gain but with the risk of loss
- Losers –
- The oil companies can also lose in this situation. Business can slowly go bad if the economy actually improves (demand will rise again and the price of oil will go up, making it harder for the companies to provide the oil).
- Unknowns –
- Almost everyone is a stakeholder in this situation: oil is a global necessity today and even many people in third world countries need oil every day for transportation and for work.
- Different countries and their governments will be impacted by this situation as they are a big influence in the flow of oil supply in their respective countries
- Find a graph to explain your problem.
- (SEE BIG GRAPH RUBRIC CHECKLIST FOR ACCURATE WAY TO MAKE A GRAPH)
- Analysis: What is the current situation and How should decision makers proceed?
- The current situation in this article (dated May 24, 2009) is that the oil market is going through a strange but dangerous phase. The article title itself states that supply has increased and the demand has decreased yet the oil prices keep rising. Really, only the demand has decreased, which results in a larger, unused and available supply of oil.
- Alternatives — what options are available?
- What are the pros and cons of the alternatives?
- Given the cost/benefit analysis, which of the alternatives is best?
- Should stop letting speculators buy the oil, suppliers should start taking control of the flow of the oil.
- Suppliers can bump down the prices.
- (Alternative 1) The oil industries can start limiting who they sell their oil to; instead of allowing investors and speculators to purchase the oil and control the flow of oil industry and the money that comes from that industry, oil suppliers should limit their business with speculators. Letting speculators invest in the oil stocks will curve the demand curve because they are constantly investing money in the hopes of gaining more money out of the stocks. Speculators don’t really need the oil unless they’re sending it to gas stations or companies that provide gas and oil for the public.
- Pros: Without the speculators making many investments and buying all of the oil (thus shifting the demand curve), the oil industry can get back on its feet and instead focus on serving the people who really need the oil (the public, most importantly). This might help hone the demand curve once again and give the oil industry an equilibrium point that everyone is willing and able to buy and sell. Maybe then will supply and demand move normally for this inelastic product.
- Cons: Simply put, all the oil industry will lose is all of the investors of oil. This means that oil companies and industries will probably suffer from the loss of the buyers of whom were speculators.
- (Alternative 2) Oil suppliers and oil industries can bump down the prices in order to keep the speculators from investing too much in the oil. In the event that oil prices are lowered, the law of demand states that the demand of oil will surely rise and might improve the economy of the oil industry.
- Pros: Typically, the drop in the price is meant to attract many customers (hopefully from the public or from services that use oil to provide gas, for example) that will buy more oil and will therefore help to boost the economy of the oil industry. This should help the economy of the oil industry. On the other hand, because oil is such an inelastic product, it’s unlikely that any change in price will do anything to the demand.
- Cons: At the same time, speculators might actually find this more likeable depending on their situation. If this happens, the economy of the oil industry may just get worse because speculators will simply keep investing in oil and shifting the demand curve with all their purchases.
- Out of the two alternatives, the first one is the better solution to the problem. If the suppliers bump down the prices of the oil, they risk a chance that the speculators increase their income power and actually invest more on oil instead of what the industry wants them to do – stop messing with the oil economy. There are far too many cons and negative possibilities with the second alternative and the first alternative directly gets rid of the speculators themselves (limiting who the suppliers provide oil for).