Demand and Supply

In order to assess the recent developments in the price of oil in world trade, it is important to analyze the underlying forces of demand and supply.

Demand for oil is a derived demand according to its many diverse uses. Oil can be used to satisfy the three main needs of mankind, namely, food, shelter and clothing. Oil is obviously used as fuel as the main source of energy and as the major input in all petrochemical industries which could provide us with shelter and clothes. What is not obvious is the use of oil for food. Petroproteins or Petroleum Proteins or Single Cell Proteins (SCP), as they are interchangeably called, are protein concentrates that are produced by growing specific micro-organisms in petroleum or natural gas media in addition to other chemical essentials. Given adequate engineering and biochemical conditions, these micro organisms multiply at a phenomenal rate. The end product is a concentrate which is further separated, purified and then prepared for consumption. Its protein content ranges from sixty to eighty percent and has been successfully used as animal feed in United Kingdom and France.

As energy is an important vehicle of production and growth, oil is still its main source and has no competing substitute to replace it altogether in the foreseeable future. It follows, therefore, that the demand for oil within a certain band of prices and within a certain time interval is inelastic. This means that if there is a relative increase in its price within a certain affordable band, the relative change in the quantity demanded for oil will turn out to be less than the relative change in its price. My preliminary calculations show that the quantity demanded for oil was insignificantly reduced as a result of the quadrupling of its price. Faced with such an inelastic demand within a certain affordable band of prices, oil producers could always increase their revenues if they offer fewer units for sale. Supply restrictions is then a method by which oil producers could increase their revenues. Similarly Brazilian coffee growers ended up with increased revenues as they burnt part of their harvest because demand for coffee turned out also to be inelastic. Many such examples of contrived scarcity can be drawn from the economic history of free market economies.

Furthermore, restrictions of the supply of oil in certain countries such as Libya and Kuwait were intended to expand their most important potential source of wealth over a longer span of time. If such conservation policy is adopted, it will undoubtedly affect future pricing of oil and will, of course, increase Petrodollars earnings.