Archive: January, 2016

Black market

They say that very few things move faster than 30 mph without oil. For this reason and because it is an essential component for a vast range of products from fertilisers to electronics to cosmetics, oil is the most important natural resource for industrialised nations. The market for the black stuff has collapsed in the last 6 months. The price of a barrel of crude oil has dropped from a high of $145 in July 2015 to $30 now.
Given the wide application of oil and the 70% reduction in price, is there an opportunity for buyers and consumers to ask suppliers to pass on cost reductions?
As anyone with a car will testify, a decrease in the price of oil does not necessarily lead to a corresponding decrease in the price of petrol. The main reason is that the cost of refined petroleum is only a fifth of the retail price of petrol. Tax makes up the lion’s share at over half the price.
The most important factor when considering the price of oil is that it has very few substitutes. Car owners and product manufacturers have to buy it. Although the big oil producers suffer when the price of a barrel of crude oil drops, those that refine crude oil and convert it into products used in manufacturing have little incentive to pass on the reduction. A lack of substitutes is characteristics of a product with low price elasticity of demand. This means that a change in price of oil has a relatively small effect on the quantity of oil demanded.
Unfortunately, buyers and consumers are unlikely to be rewarded for challenging suppliers based on the collapse of the price of crude oil. While the rest of us watch and wonder how long the slump can continue, the oil producers continue to suffer.