Market price: demand and supply
Today the PetroCaribe Agreement and Guyana’s oil importation has to be contextualized against the dramatic fall in the global price of oil, which started in mid-2014. Back then the price of crude oil was about US$115 per barrel; presently it is hovering around US$45-55 per barrel. This decline in the price of oil of 60 per cent in about seven months, has been faster and further than any major analyst had forecast. Furthermore, most analysts presently predict the decline will be sustained all this year and perhaps into 2016. This situation dominates international development discussions of the risks of global commodity cycles (as considered in this column, on February 1) and their impact on global financial and equities markets.
Economists urge that the basic starting point for any discussion of price is their famous theorem that, most, if not all of us, have experienced in one form or another. That is, the price of any product traded in a market depends on three factors, namely 1) the demand for the product; 2) the supply of the product; and 3) expectations about the way price will behave in the future. Since this holds true for all markets, therefore all likely explanations of the dramatic fall in global oil prices are traceable to combinations of these three market variables. Having noted that, economists urge that the identification of the drivers behind each of these three variables has to be established.
Readers should observe that this market-based explanation of global oil price behaviour has been challenged. Thus for example, while not rejecting the usefulness of a market explanation of oil price formation, a broader political economy explanation is preferred by some analysts. Others go further and argue that in the special case of the