Patterns in Oil and Car Prices
Patterns in Oil and Car Prices
In many decades, it has proven difficult to predict the prices of oil and other related products. This has created turbulences in many economies of the world since fuel is a major factor in economic growth. Due to these uncertainties of oil prices, some patterns in the economy have unveiled (Armstrong and Robinet 1). For instance, the price of some middle-class cars increases as the oil prices decreases and vice versa in developing countries. This pattern in motor vehicle industry and oil industry is interesting since the two falls in different markets. This paper will try to use some basic economic concepts to explain this pattern in oil and car prices.
In a perfect environment, the two forces of the market are normally used to determine the prices of goods and services. These forces are demand and supply which assume that, as the prices of the commodities increases, the supply increases while on the other hand, as the price increases, the demand for the commodities decreases. The two curves that is, supply curve and demand curve, intersect to form an equilibrium point, which is used as the price of the given commodity such as some car price in our case. This concept may only apply when no other factor in the market that affects the prices. In the real world, this may not hold due to the escalating level of competition, political instability, natural calamities, and imperfectness of the market.
In our scenario, the demand and supply of oil is regarded as inelastic, that is, demand and supply do not change, or change is insignificant with respect to prices. This is because there are no oil substitutes, which the consumers may turn to. Also, the oil industry is regarded as a monopoly. This is where the cartels formed by oil exporting countries dictate the prices of the oil and not due to the mechanisms of demand and supply. This makes the planning, forecasting hard and, therefore, making major economic decisions more difficult.
In developing countries, as the prices of the oil decrease, the prices of some middle-class cars increases and vice versa. Economically, this may be viewed that during low oil prices, the consumers are able and willing to buy new cars since the daily maintenance cost of the car with respect to fuelling and other products will go down. Consequently, as the demand for cars goes up, the prices automatically shift to higher levels. On the other hand, when the oil price increases, the maintenance cost of the cars with respect to fuelling and other oil products increases. This reduces the willingness of the consumers to purchase new cars due to the high daily costs associated with the cars. As a result, the demand goes down hence shifting the prices to lower levels.
In conclusion, since the oil prices are unpredictable, the manufacturers and dealers of middle-class motor vehicles can study the pattern in changes in demand for the car; hence effectively plan for the stock to hold with specific cars.
Armstrong, Tim and Robinet, Michael. “The Impact of Lower Oil Prices on the Auto Industry.” Agenda.weforum.org. 20 Jan. 2015. Web.24 Oct. 2015.