Shale Oill Case Study

Prajjwal Acharya

Bn17111

Managerial Economic

WestCliff University

Presidential Business School

Professor: Khashadourian/Bibhu Aryal

Abstract

This case paper enlighten about the shale oil and impact in the elasticity of supply and demand.  This case study helps in its presents from covers of all the topics of supply and demands that are usually covered in this paper. Different graphs will make easier to understand demand and supply curve by the context of oil. The US shale oil production is increased the price is fall by 60% due to supply of oil is increasing and how did it affect the in the international market. Through, the supply and demand I have analysis its price action and how it looks in the long run and short run.

Introduction

 The term oil shale basically reflects the sedimentary rock which contains kerogen (a solid mixture of organic compounds) to produce the oil. It is the replacement of conventional crude oil in the US. This oil shale produces the petroleum liquids by heating the rock through chemical process of pyrolysis. Oil shale is mined and processed to produce the petroleum, natural gases, coal and oil. This oil shale is solid and which directly cannot pump out by ground. This process of oil shale is different which is firstly, mined and then high temperature is provided to release the hydrogen for resultant liquid. After, the release of hydrogen the liquid is separated and collected to make products of petroleum and natural gases.

Factors affected the price of oil in international market:

Here, the price of oil has fallen magnificently 60% in the international market in past years and the reason behind that is shale oil produced in US. Therefore, the supply of oil is increased automatically as high produced of the shale oil. Other thing remaining constant the price decreases when supply increases then demand remains constant. When the demand is high then supply can be upraised but the condition of demand should be constant then increasing supply results price falls. The US shale oil production is increased the price is fall by 60% due to supply of oil is increasing. According to lutz kilian "The shale oil production is exponentially growth form 0.4 million barrels a day in 2005 to 4.25 million barrels a day in 2015. This situation has created due to the high price of crude oil in 2003. (lutz kilian, 2015).

Price Elasticity Demand and supply of shale oil

The price of oil is also regulated by the demand and supply as like the other commodities. It is sated that the country economic activity is closely related to the demand and supply of oil too. (Joseph shaji, 2015). As seen, those who observers as stated (experts of country economist) has expected that rapidly growing shortage of crude oil didn't happen any affect in the many parts of US due to highly produced of shale oil. Later, shale oil has created a huge market around the world. The most of the countries like India, china, Russia etc. start trade with US which highly affect the market of crude oil.

Demand and supply of commodity related with its own price like is price and quantity. Therefore, the elasticity of demand for oil is slightly inelastic in the short run but far more elastic in the long run. Here, the demand of crude oil is affected by the change in high rate price at sudden. We know, the demand is directly related to the price and quantity.  Due the sudden change in price of crude oil, the supply is low of crude oil and high of shale. When there is high price in market all around the world, most of the countries looking for the alternative of crude oil and the alternative of crude oil is shale oil. Supply of shale oil is highly increased in the most of part of the US and all around the world. It is said that, in the market if a buyer doesn't accept a price of the product offered by the seller at any market, people may move to another market to try a cheaper rate. The condition of shale oil is same due to high rate of crude oil. Demand of shale oil is highly increased in the global market. Demand depends on the price and utility of the product and the supply depends upon the cost of production and the price prevailing in the market. (Lipsey & Chrystal, 2007) Elasticity of demand is the alertness of quantity demanded where there is significance change on the price. Although, the shale oil break the oligopoly of arabain oil companies.

        Supply is defined as the willing and able to sell at different rate of quantities of goods and services. Here the supply of oil is high and when the supply is increased the equilibrium price is low and equilibrium quantity declines. The supply and demand at higher prices like suppliers are willing and able to sell larger and larger quantities.  The quantity of oil supply is increased and when supply is increased the shift in supply curve changes towards the origin of graph.  The shift in supply curve and shift in demand curve change equilibrium price and quantity thereby, providing the oil.  

        Let's look at a graph of demand and supply of oil on the basic of supply curve

        Y        [pic 1]

        S[pic 2][pic 3][pic 4]

        Price                S1[pic 5][pic 6]

             P1        E[pic 7][pic 8]

        P2        E1

         D

        Q1        Q2        X[pic 9]

        Quantity

         In the figure, the price of oil is fall from P1 to P2 where the bumper oil is produced. In this example, if the demand curve is more vertical i.e. (more inelastic) the adjustment of price and quantity sets a different new equilibrium between demand and supply. This shows how the elasticity of demand affects the size of adjustment in price and quantity when supply shifts, the demand curve slope move vertical then that depict.  Here, the compare is done with the first situation of price and quantity with size. With the similar shift in supply, equilibrium change in price is larger when there is inelastic in demand then the more elastic in demand. The opposition is true for quantity.  

        Now, the shift in supply curve and shift in demand curve change equilibrium price and quantity. Here, A decrease in supply leads to a higher equilibrium price and a lower equilibrium quantity. If supply rises and demand stays the same the demand curve D, and supply curve S. Then a second supply curve S1, representing an increase in supply. That, I plot in the figure. The supply of oil is increase the demand remain constant as seen in the figure.

Impact of Price Elasticity of demand and supply in long run and short run