Market Equilibrating Process

Market Equilibrating Process

Introduction

As world economies started to slow down the price of gasoline was climbing due to the uncertainty in the global crude market and “oil speculation the buying and trading of oil is done in futures which is an attempt to predict the cost of oil at a later date” (McNulty, 2009). Americans stared blankly as gas prices climbed, the economy was crumbling, and unemployment was inevitable. The balance between supply and demand is how the market can be viewed as being equilibrated. “Markets bring together buyers (“demanders”) and sellers (“suppliers”), and they exist in many forms” (McConnell, Brue, & Flynn, 2009, p. 46). The oil/gasoline market is a great example of understanding this process.

Market Fundamentals Most Important Factor in Current Market

Over the course of the last several years, the global market and traders have pushed prices beyond the supply-demand basics and into a bubble in oil markets. While speculation plays a role in providing liquidity to the market, the factors of “uncertainty in the global crude market, refinery shutdowns and increasing global demand, as well as depreciation of the U.S. dollar had an impact oil market” (Decker, 2009). These are just some of the contributing factors to uncertainty or risk in supply and demand and play a large role in the rise of oil prices. “Increasing demand for oil worldwide played the larger role in increasing oil prices as the global demand was exceeding supply by one million barrels per day. As a result, a market with highly inelastic demand will need to equilibrate through a substantive rise in price” (U.S. Energy Information Administration., 2010). This created a problem for Americans as companies were closing and laying off workers, the high price of gasoline in some parts of the country reaching over $4.00 a gallon was increasing the price of food because of the cost to transport the materials. The U.S. economy was crumbling at a much faster rate...