Oil Market Essay Example | Topics and Well Written Essays - 1000 words - 1

Oil Market - Essay Example Deflation pressure, not inflation, is currently one of the greatest concern for the global economy. During the previous year, producer prices have reduced all over the developed world; consumer prices have been decreasing for the last 6 months in Germany and France; in Japan wages have actually dropped 4% for the past year. Up until the latest crisis prices were decreasing in Brazil; they continue to fall in China and Hong Kong; most probably they will soon be declining in various other developing countries (Case & Fair, 2005). Currently, none of these price reduction of oil seems anything like the great deflation that followed the Great Depression. But the presence of deflation as a common problem is worrying, not just because of its direct economic effects, but because until lately most economists considered sustained deflation as a profoundly incredible prospect, something that must not be a worry (IMF, 2011). Although changes in prices have been controversial, they are the unavoidable outcomes of shifts in demand and supply. The demand and supply of oil are comparatively inelastic in the short run: price changes have a small effect on either the quantity supplied or the quantity demanded. When there is an increase in oil prices, we spend some energy and time complaining but, in the short run, spend nearly no effort in adjusting our habits to consume less. Likewise in the short run, price changes do less to spur new supplies. As the quantities demanded and supplied change slightly as prices increase and decrease, both curves are comparatively vertical as shown in the figure below: Â  Since quantities are comparatively fixed in the short run, any shifts in demand or supply affect prices. For instance, supposing that supply decreases. The reduced supply makes a temporary shortage that will increase the price. If demand is elastic, only a slight increase in price will be required to