How will world oil consumers respond – buying more or less of the oil reserves?
Under normal market conditions, the forces of demand and supply push the demand and supply curve to an equilibrium point where the quantity demanded equals the quantity supplied. In economics, the price elasticity of demand theory holds that an increase in price decreases demand. However, the price of oil depends more on future expectations than the prevailing demand and supply. A geopolitical tension directly affects the current and future market prices of oil and oil products. In the United States, there prevails an estimated $4-$8 fear premium of oil prices per unit barrel.
From an economic point of view, a geopolitical fear would disrupt the oil supply, which would obviously affect the oil prices upwardly. The effect of a possible attack on Syria would trickle down to the nations supplying oil thus disrupting the whole line of oil supply. A disruption would mean that only a few suppliers would prevail in the market to dictate the price at which to offer the oil and oil products. There would be a shortage, where, the amount of oil demanded would be higher than the quantity supplied. These few suppliers would shoot oil prices and the consumers will have to pay more to obtain the scarce commodity.
If the condition prevails for a longer period than expected, the government intervenes to protect the consumer from molestation. The ministry of energy and natural resources usually keeps oil reserves for emergency cases. Therefore, the geopolitical shock is treated as an emergency crude oil released from reserves to counter the geopolitical shock and meet the needs of the consumers. Therefore, increased oil prices beyond the set limit lead consumers to buy more of the oil reserves.
How will world oil consumers respond – buying more or less of the oil reserves?
Oil supply disruptions are emergencies that any nation can encounter. Whenever such an emergency occurs, the demand surpasses the supply leading to a shortage. Inflation invests in the oil market and the consumer is at risk of exploitation as the prices of oil become highly exaggerated. In normal cases, the demand and supply of products depend on the prevailing market price and the law of price elasticity of demand applies, where; an increase in price decreases the demand for the commodity. However, oil is unique because its price does not only depend on the prevailing demand and supply forces but also depends on the future expectations of shocks. In any case, the demand for oil is somewhat inelastic for commercial firms. Regardless of the price of oil and oil products, the firms would have to purchase the same quantity of oil.
Geopolitical tension is a shock that directly affects the current and future prices of oil and oil products. The tension is an emergency that distracts oil supplies and calls for government action for the release of oil reserves. According to the EU, the oil reserves should be readily available and accessible to respond to shocks. In this case, there are likely geopolitical conflicts between Syria and the US. Despite the fact that Syria is not the main oil producer, analysts predict that the impending strike by the United States could cause conflagration, which then radiates across regions that supply oil. The strike would spread unrest and thereby disrupt the Middle East supplies leading to inflation of oil prices. Therefore, the ministry of energy will respond by availing the oil reserves to the consumers. This means that a geopolitical fear of oil prices will cause consumers to buy more of the oil reserves.