The law of supply and demand, primarily affecting petroleum industry in determining the price of “black gold”. Costs, and expectations about the cost of oil are the main determining factors in how companies in the industry to allocate their resources. Prices create incentives that affect behaviors; this behavior ultimately take into account the demand and supply determine the price of oil.
For example, prolonged periods of high oil prices will lead to consumers of steel to avoid funds that are not economical or reducing their driving. If the utilities cost more, businesses and individuals can pay more attention to energy savings. These factors reduce the demand.
On the supply side, high oil prices lead to more drilling projects; a more detailed study cash infusion and innovation in new technologies and efficiency; and many of the projects that were not viable at lower prices to become viable. All these activities increase the supply.
The low price of oil creates the opposite incentives. Production is falling, as many companies in the oil industry could declare bankruptcy, and projects in development are closed, it’s crushing power. The demand is also increasing as people more drive and focus on efficiency is substantially less because of the smaller amount of energy.
Example of the impact of high prices was noticed in the period between 2007 and 2014, a period when the price of oil soared above $100 for the most part. Massive investment poured into the sector credit and new businesses. Production increased in response to high prices, especially with innovations in gas production and oil Sands. These investments can be justified only on the basis of high oil prices and contributed to the record supply in 2014.
But the high price of oil has also led to great advances in efficiency and alternative energy, which contributed to the decline in demand for TV man. In the summer of 2014, was a deflationary shock because of the economic slowdown in China and Europe. Given the dynamics of supply and demand, oil prices cratered, falling by more than 50% within four months.