Bukit Timah Tuition Centre - Economics Tuition - What factors affect the demand for oil.
Demand for oil refers to the consumer’s desire and willingness to purchase oil based on the consumer satisfaction and the ability of the consumer’s purchasing power to purchase oil at a particular period of time and the maximum price level. It is important to examine the determinants of demand for oil, which can be classified as price-determinants and non-price determinants.
First, a change in the price of oil will lead to a change in quantity demanded for oil, which can be illustrated by a movement along the demand curve. The rise in the price of oil will lead to a fall in quantity demanded for oil, whereas the fall in the price of oil will lead to a rise in quantity demanded for oil. The change in price of oil will be deduced by non-price determinants of supply for oil, reflected through the market equilibrium.
Second, the non-price determinant of demand for oil will cause a change in demand for oil, which can be illustrated by a shift of the demand curve. One such non-price determinant of demand for oil is the price of related goods. The fall in price of a substitute, such as natural gas, will lead to a fall in demand for crude oil. Also, an increase in price of a complementary good, such as petroleum, will lead to a fall in demand for crude oil.
Third, changes in income will also cause a change in demand for oil. An increase in income will lead to an increase in demand for oil as oil is classified as a normal good. Higher income will raise the consumer’s real disposable income, such that there will be higher demand for normal good, such as oil as oil occupies a large proportion of income spent on it.
Fourth, changes in tastes and preferences will also affect the change in demand for oil. Changes in preferences can be brought about by advertisements, education and cultural factors. For instance, in the more environmentally-conscious countries, consumers may adjust their consumption patterns to reduce carbon footprints, such that there is a fall in demand for oil.
Fifth, changes in government policy may affect the changes in demand for oil. When there is an increase in tax imposed on oil, the price of oil will be higher, thus leading to a fall in demand for oil. When there is an increase in subsidies for oil will encourage the consumption of oil, thus raising the demand for oil.
In view of the various price- and non-price determinants of demand for oil, it can be argued that changes in price of oil is the most important factor. The importance can be further discussed through the elasticity of demand and supply concepts.
In conclusion, these determinants of oil will contribute to change in demand of oil and thus lead to a change in price and output of oil. As for how the determinants will affect the demand for oil, it will depend on the nature of the economy and influence the consumer behaviour.