The Supply and Demand of Energy and Oil

Thomas Edison invented the light bulb in 1879. The first oil well was drilled in Pennsylvania in 1859. Since those two historic discoveries, technology and industry have exponentially grown to a point of absolute necessity today. The requirement of energy and oil throughout the world grows with advancement. As developed countries, like the United States, Japan, China, and Canada, progress and grow in population, more demands for energy and fuel are created. Likewise, as less advanced countries bring themselves into the global economy, they will also have increased energy and oil demands. So then the question begs, where are the resources for these demands coming from and what options will there be for future demands? Given current needs and forecasting the global needs of the future, a brief economic analysis will show what the world is up against.

Energy and oil have a direct relationship. Energy is the electricity, heat, and fuel needed to power all the aspects of human lives. Oil itself is the main resource for energy, contributing 37% to the global energy supply. Specifically, oil as a source of fuel is used to power the majority of transportation throughout the world. However, it also has significant use in heating and making electricity. There are many other sources of energy as well. The second largest provider of energy is coal, which accounts for about 25% of the world’s energy consumption. Gas covers 23% of the energy need. Other sources include nuclear power, biofuels, hydro power, solar heat and light, and wind. All of these forms of energy contribute to the global energy supply, with oil being the most heavily relied upon.

Now the world faces a problem. The top three energy providers, accounting for about 85% of the word’s current energy supply, are non-renewable fossil fuels. Primarily, oil is at a premium because of political unrest (rightward shift in supply), reserves are at the beginning stages of drying up (rightward shift in supply), and increasing demand world-wide (rightward shift in demand). The recent spike in gasoline prices has been affected in the short term due to political issues in the Middle East, and other sources abroad, such as Venezuela. This is obvious to anyone who has filled up their car lately. A real testament to this is the Federal Energy Information Administration’s 2007 International Energy Outlook document, released in May 2007, which forecasted oil prices to not hit $100 per barrel until the year 2030. Oil prices reached that mark within the last month. As for oil reserves, the current estimates vary as to how long they will last. However, there are many factors that weigh in on this assessment, such as economic feasibility of the oil recovery, environmental interests (in drilling and effects of continued usage), and shift of demand to other sources of fuel. Finally, increasing world demand will have the greatest impact on oil usage.

Economically speaking, the increasing world demand on energy, and specifically oil, will shift the demand curve to the right. This will cause the price equilibrium to increase, as is easily observed. Most major oil-consuming countries, such as the United States, Canada, and Japan, currently are having a small increase in demand for oil. However, as previously stated, up-and-coming world economic players are quickly increasing their needs for energy. China is having the biggest influence on this changing demand. They have become a major source of manufactured goods and are making large strides to increase China’s place in the world market. Manufacturing sectors in general, require the most energy consumption. China acquires a lot of this energy by burning oil. Likewise, countries that are less impactful as of yet, but will likely be effectual in the future, such as India and South Africa, will also increase the demand for energy and oil.

This rightward shift on demand greatly affects the individual consumers. As oil prices continue to rise, there is a greater effect on individual incomes. Jobs will be lost due to manufacturing plants reducing production to save on energy. Perceived standards of living will be reduced by lowering thermostats in winter and raising them in the summer. People will reconsider how necessary it is to drive somewhere or buy products affected by the rising oil prices. For example, family trips that had previously been planned for farther away destinations now may be planned for local amusements to cut down on travel cost. This would then have an impact on tourism. Consumers see the influence of oil prices on goods as well. At the grocery store, produce has become more expensive due to shipping costs. This may in turn persuade people to buy more locally grown produce or find substitute foods for what they wanted. This will impact imports from other countries and especially farmers within our own country, since a