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Oil prices fall on dimming prospect of output restraint

Oil prices fall on dimming prospect of output restraintIn order to know what is affecting oil prices, it is indispensable to determine the most important variables that have caused the increase or decrease upon its prices (Mcguigan, Moyer, & Harris 2014). There are many factors involved in oil demand; however, Javan and Zahran (2015) states that ‘economic growth represents the single most important driver’. Since the 70s, oil demand has experimented an exponential increase due to industrialization, urbanization growth, and so on (Javan, A, & Zahran, N 2015). However, nowadays, the growth issues faced by Asia (Krishnan, B 2016) has instigated that its demand dropped considerably. As oil demand decrease, so does its value. As a result, Singapore’s oil prices have been directly affected and have plunged. Further, other reasons for this dropping has been the appearance of Iran in the market with its light crude, which is the most wanted oil in the market. This has increased the world supply (Nikonov, I 2014), with a low demand.
Furthermore, the economic structure is different in every country (Javan, A, & Zahran, N 2015). The fall upon oil prices will result into a drop in petrol prices. As a result, with a petrol supply with low prices, the market of cars will face an increase upon demand. This increase upon demand could be higher or lower depending upon the country where the market is located.
GB540
Assessment 1: Case Study
Discussions
Example of Critical Discussion
of Another Student’s Answer
1. Has the answer applied the correct economic theory to analysing and addressing the
case study questions? Why or why not?
2. Is there a better way to address the question using economic theory and/or other
considerations? If so, briefly, what is it?
Real-world economics review, issue no. 46
The housing bubble and the financial crisis
Dean Baker [Center for Economic and Policy Research, USA]
Copyright: Dean Baker, 2008
The central element in the current financial crisis is the housing bubble….
The origins of the housing bubble
The housing bubble in the United States grew up alongside the stock bubble in the mid-90s. The
logic of the growth of the bubble is very simple. People who had increased their wealth
substantially with the extraordinary run-up of stock prices were spending based on this increased
wealth…
The stock wealth induced consumption boom also led people to buy bigger and/or better homes,
since they sought to spend some of their new stock wealth on housing. This increase in demand
had the effect of triggering a housing bubble because in the short-run the supply of housing is
relatively fixed. Therefore an increase in demand leads first to an increase in price….
The second phase of the housing bubble
The run-up in prices in both the ownership and rental markets was having a substantial supplyside
effect, as new house construction (also known as dwelling starts) rose substantially from
the mid-90s through the late 90s. By 2002, new house construction was almost 25 percent above
the average rate.
… The voluntary foreclosures take place when people realize that they owe more than the value
of their home, and decide that paying off their mortgage is in effect a bad deal. In cases where a
home is valued far lower than the amount of the outstanding mortgage, homeowners may be to
able to effectively pocket hundreds of thousands of dollars by simply walking away from their
mortgage.
Regardless of the cause, both sources of foreclosure effectively increase the supply of housing
on the market. In the first quarter of 2008, foreclosures were running at a 2.8 million annual rate
(RealtyTrac), which was nearly 60 percent of the rate of sales of existing homes in the quarter
A similar dynamic took hold on the demand side. During the run-up of the bubble, lending
standards grew ever more lax. As default rates began to soar in 2006 and 2007, banks began to
tighten their standards and to require larger down payments. The most severe tightening took
place in the markets with the most rapidly falling prices. With lenders in these markets requiring
down payments of 20 percent or even 25 percent, many potential homebuyers were excluded
from the market. These thresholds not only excluded first-time buyers, but even many existing
homeowners would have difficulty making large down payments, since plunging house prices
had destroyed much of their equity.
By the end of 2007, real house prices had fallen by more than 15 percent from peak.
Source: http://paecon.net/PAEReview/issue46/Baker46.pdf
1. What non-price determinants of demand influenced the US market for housing in the
early 2000’s? Demonstrate the effect these had on the US market for housing using by
describing a demand and supply model.
Increased income and wealth of homebuyers, low interest rates as well as
expectations that prices would continue to rise are the non-price determinants
that increased demand for housing in the US (McConnell, Brue & Flynn 2012, pp. 50-53). This
would shift the demand to the right and cause an increase in price and quantity
traded.
Critical Discussion:
This answer is very direct and addresses the question well. The response
considers the effects on demand in the early 2000’s on the market for housing, but
does not consider the supply-side factors which would have also influenced the
market. Even though the question did not ask for it, perhaps they could have
mentioned that new house construction was up 25% in 2002 and supply of
housing was also increasing. This combined effect of an increase in demand and
supply would definitely increase quantity trade but the effect on price would be
uncertain and depend on the relative shifts in demand and supply.
2. Once housing prices started to fall in 2007 what other factors impacted demand and
supply in the market according to the article?
The first supply side factor was that many people were walking away from their
mortgages and being foreclosed by the bank as the price of their house
decreased.
The effect of a foreclosure is that the bank repossesses the house and tries to sell
it to recover the unpaid debt. A lot of foreclosures at once meant that many
houses came up for sale and the supply of houses on the market increased even
more (Reserve Bank of Australia (RBA) 2009). This increase in supply acted to
push down prices and increase the supply of houses on the market.
At the same time banks tightened their lending standards meaning that less
people could get loans to buy houses and demand for houses decreased (shifted
left). The cumulative effect was a further fall in price and a slight decrease in
quantity traded. The effect on quantity depends on the relative magnitude of the
shifts. Arguably the supply side effect was strong given the sharp increase in
foreclosures, however the decrease in demand owing to falling loan approvals
might have been stronger meaning that overall quantity traded would decrease
(Reserve Bank of Australia (RBA) 2009). Example of Referenced Case Study
Response
Critical Discussion:
This answer is very comprehensive and well-researched. The point which is
debatable is what will happen to quantity traded of housing in 2007. As demand
decreases and supply increases we need to ask ourselves which effect will be
stronger by looking at the underlying causes for the shifts. Both shifts will ensure
prices will fall, and indeed they did fall up to 40% in 2007-8, however perhaps we
can argue that supply would have continued to increase more than the author
suggests as building construction (mentioned in the article as booming in the
200’s) is not very responsive (elastic) in the short-run and would have continued
to grow for some time which would have added even more to supply meaning that
quantity traded would increase.
Reference list:
McConnell, CR, Brue & SL, Flynn, SM 2012, ‘Demand, Supply and Market Equilibrium’,
Economics, 19th edn, McGraw-Hill Irwin, Boston, pp 50-53
Reserve Bank of Australia (RBA) 2009, The Global Financial Crisis: Causes,
Consequences and Countermeasures, 15 April, viewed 13 January 2015
http://www.rba.gov.au/speeches/2009/sp-so-150409.html.

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