Consequences of a Fall in the Global Price of Oil Coursework

Consequences of a Fall in the Global Price of Oil - Coursework Example Most economists believe that since oil is associated with so many products any change in its price have a trickle-down effect or a chain reaction affecting the prices of many commodities and/or affecting the rate of inflation in the economy or the general price level. If we suppose that there has been a fall in the global price of oil there will be a fall in the quantity supplied of oil because the producers will now be left with a lower profit margin and some of them may also go out of business if they would find it difficult to cover their average variable costs. There will be an increase in the quantity demanded of oil and buyers who were not able to afford oil at previous prices and opted for substitutes may now turn towards oil, current buyers may also buy more. If we take the example of British Petroleum, BP will reduce its quantity of oil supplied to the market because they will now experience a lower return on oil, its current customers may want to buy more since the product is now available at lower prices and some customers may now be interested in purchasing oil rather than purchasing its substitutes such as coal, gas etc. The fall in oil prices may cause some producers who were already finding it difficult to cover their costs to go out of business or shift to the production of other commodities, this means that BP will now have a lower number of competitors in the market and will face a lower competition than in the past. Si nce the affect on the quantity supplied is due to price there will not be a shift in the supply curve of BP, it will operate on its previous supply curve but at a lower point because of the contraction in supply. Similar is the case for quantity demanded, BP will not experience a change in its demand curve because of a change in price, it will operate on the same demand curve but at a higher point due to the extension in demand.