Commentary Number 1 Extract

Venezuelas strike boosts oil prices

Opposition-led action
against President Hugo
Chavez deals a huge blow to
refining and shipping
activities in the country
Oil prices climbed yesterday
as Venezuela prepared to
notify some customers that it
would not be able to meet
commitments for crude and
refined product deliveries
due to a four-day general
strike against President
Hugo Chavez
!" light crude C#c$
traded $% !" cents higher at
!"&%'($ a barrel)
e*tending +hursdays ,--!"
cent gain) as the opposition-
led strike in Venezuela cut
into refining and shipping
operations and snowstorms
in the !nited "tates boosted
demand for heating fuel
.part from disruptions to
oil supplies - Venezuela
supplies about $/ per cent of
the !" daily oil imports -
analysts said the longer-term
potential impact if 0r
Chavez was forced to step
down was also playing on
traders minds
1Venezuela is worrying 2f
Chavez buckles and is
overthrown) whoever comes in
afterwards is likely to raise
crude output)3 said
commodities strategist 4avid
+hurtell of Commonwealth
5ank in "ydney
. board member at state oil
firm Petroleos de Venezuela
said on +hursday that the
company was preparing to send
out force ma6eure notices to
clients yesterday) meaning it
would not be able to meet
orders due to reasons beyond its
control
+he strike has severely
disrupted refining and shipping
operations in the worlds fifth-
biggest oil e*porter and the
countrys daily crude
production of three million
barrels was e*pected to begin
declining in the ne*t day or so
0r +hurtell said the market
would also be looking out for
comments from 2ra7 or the !")
with tomorrows deadline
looming for 5aghdad to submit
a detailed report of its weapons
programmes
2ra7i president "addam
Hussein said on +hursday he
was ready to give !nited
8ations arms inspectors a
chance to disprove !"
allegations that it has
stockpiled weapons of
mass destruction
9ashington) which has
threatened to go to war
unless 2ra7 can prove it has
renounced biological)
chemical and nuclear
weapons programmes)
insists it has intelligence
backing its contention
+he weapons deadline
comes four days ahead of
the Organisation of
Petroleum :*porting
Countries ministerial
meeting in Vienna ne*t
+hursday to review oil
market conditions and
production policy
. ;euters survey on
+hursday found the cartel
continued to pump far in
e*cess of official
production limits last
month) with the surplus
above 7uota topping three
million barrels for a second
month in a row
Oil supply from the $<
members bound by supply-
7uotas) e*cluding
sanctions-hit 2ra7) was
%(-- million barrels per
day versus the official
ceiling of %$' million
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Diploma Programme Economics Teacher Support Material: Internal Assessment, November 200 !"
Port#olio A
Commentary Number 1
Price elasticity of supply >P:"? is the responsiveness of 7uantity supplied to the changes in
the price given +wo ma6or factors that affect the P:" of a good are time and availability of
producer substitutes +ime influences P:" of a good) as the shorter the time period) the more
firms are faced with difficulties in controlling the production of the good @or e*ample)
assuming surfing suddenly becomes Ain thingA which implies demand for surfboards would
relatively rise) the shorter the time period the harder the firms will find to e*pand the
production of surfboards .s a result the 7uantity supplied becomes insensitive to a price
change) which is to say the P:" of surfboards is inelastic 2n the longer term) new firms come
into the market) and the e*isting firms manage to e*pand production to an ade7uate level)
which conse7uently makes the P:" of surfboards elastic .vailability of producer substitutes
>goods that a producer can easily produce as alternatives? also affects the P:" of a good 2f a
product has many substitutes then producers can 7uickly and easily alter the pattern of
production regarding to the price changes +he theory also applies for when a product has
fewer or no substitute available 2f a good has no producer substitute) the producer has to
carry on producing at the same price or withdraws from the market when a price changes)
since he would find it difficult to respond fle*ibly to the variation of prices 2n this case) P:"
of such a good is very inelastic
+he price elasticities of both demand and supply of oil) in this case) tend to be very inelastic
@irstly) there isnBt any consumerCproducer substitute available for the production of oil
Producers and consumers would find it hard to switch to any alternative) due to the large use of
oil in many different industries @urthermore) the price affecting factors such as the
snowstorms and the strike are influencing the oil industry in the short run) which contributes to
the P:" of the oil being inelastic +he !" demands heating fuels instantly after the
snowstorms regardless of its price) as it is a necessity during the cold weather 8ecessities are
generally bought at whatever price) as they tend to have very inelastic price elasticity of
demand +herefore an immediate increase in the oil price would barely reduce the 7uantity
demanded) due to its low elasticity
+he price rise is mainly because of disturbance by the strike in refining and shipping
operation) and of snowstorms in the !nited "tates .s seen in @ig%) the strike has shifted the
supply curve to the left reducing the general supply level) because of disruption to the oil
suppliers +he snowstorms in the !" contributed to a sharp increase in the demand for heating fuel)
which lead the demand curve to shift to its right
.s a result of these changes) the e7uilibrium price has gone up from p$ to p%) and the 7uantity
supplied has decreased from 7l to 7%D meaning that less of the product is being bought at a
higher price However) these on-going changes are only in the short run) therefore after a
certain period of time) for e*ample in this case) after the impact of the snowstorms fade away and
the strike is over) the curves will eventually find a new e7uilibrium
!$ Diploma Programme Economics Teacher Support Material: Internal Assessment, November 200
Port
#olio
A
.t the moment) because of the present political situation) the market
is very cautious +he oil prices could fluctuate at anytime 2f the
!" should declare war on 2ra7) there would be procurement
demand for oil) which could boost up the price of oil e*tremely
higher than its usual level because more oil is being demanded and the
P:" of oil is very inelastic due to the short time period +he current
situation) where Venezuela might increase its crude oil output and the
cartel is continuing to supply above the official production limit whilst
the demand for the oil escalates) could depreciate the price of oil) and
such overproduction is alarming as it could also lead to depletion of
the resource itself