An Econs Lesson

I had my mikro 2 mid sem exam today, I need to say that it wasn't that pleasant. Anyway, as I was revising, i came across this case study (sort of) and i thought it would be interesting to share it with you ppl.

Case: Price of oil

Ok, stop picturing your car, petronas station, number 2.70 or our PM.

There are lots of hoo-hahs going on between who to blame: the government or the supply of worldwide petrol. Theorotically, its both.
Lets start with the supply of oil.

###

Everything in this world are bought and sold based on the current price and interest rate (maybe except selling your soul, since I doubt there will be any inflation in hell). The interest rate would be the key to this issue. So actually the future price of a product/service would be the disruption of the trading flow.

How? Future prices are affected by interest rate.

Let say you're selling little hamsters for 2 bucks each. Based on speculation that next week's interest rate would increase to 10% (from none). So your tiny little friend there would worth 2.20 instead. Its calculated with this formula if you're wondering;

Future price = (1+R) * Current price

R= Interest rate (Divide it by 100, eg. 10% would be 0.1)

So, if you're the trader of hamsters (where you're not the only seller and others are selling the same price as you), would you sell your hamsters today or you keep it till next week where you can earn more?
Same goes for the oil.

Basically oil traders/producers are left with two choices to maximize their revenue.
1.) Rely on market price and interest rate
2.) Keeping the revenue in the bank with a high rate

Its either making more money or letting the money grow in the bank, that simple. Unless the banks are having high interest rates, then most probably they are keeping and limiting the supply of oil. By lowering the supply, the prices of oil will increase based on the supply-demand theory.

If you're a little confused, refresh your mind bout Malaysia's past food crisis issues. Sugar and cooking oil.
Because there are speculations that there will be shortage of those stuffs, it has caused fear to Malaysians (so gullible) and hence, everyone rushes to the nearest Tesco or Giant and fill up enough supply of oil at home where they could fry enough french fries for the next 3 months.
Supply went down and demand went up. It has pushes the price of cooking oil sky high (of course these are market price controlled items, it cant get up that far).
Worse than that was, traders are keeping those cooking oil at the back of their storage room and only selling a handful. They were waiting for the price to go up further so they could sell it at a more expensive price. Such crooks aren't they? Getting a profit while we are busy stockpilling gazillion cooking oils which we don't need.

Ok, I'm sure now you understand how the situation works. Back to the oil.

The oil producers would be working their asses off to find new sources and building more rigs if they can generate more money in the bank than making revenue from future prices speculations.

###

As for the government part, its rather trivial. Let say they have a sum of money (actually they do, what the heck i'm talking bout), its all depending on how much its allocated to each sector and area. The reason our oil prices went up its because of the world supply of oil PLUS they decided to subsidize more to the citizens instead of the oil...and probably towards a whole lot of other stuffs like giving Lee Chong Wei 300 grand.

And politics played a huge role in this as well. Trust me or not, these decisions are made by human being and does not form naturally out of the economy system. Sad to say, they are the ones who decide how much our oil price going to be. Of course they will nag that the oil subsidies are gettin sky high, but nevertheless, still do-able rite? Its all boiled down to how they allocate the money. We're not some less developed countries where we are dying in each and every sector. For god's sake, Malaysia is being categorised as Upper Middle Income Country! Probably we will be having better budgets if they didn't send that angkasawan's ass up to the moon and buying 2 fighter jets from Russia. They must be laughing their ass off at us.

###

That's the rough theory on prices, future prices and interest rate affecting each other. Of course there are always other factors in role as well such as inflation, political relations, substitute products etc etc.

I could be wrong (or right) on this matter. But nevertheless, thats the interpretation and facts extracted from a uni level reference. If its wrong, blame them and leave me alone :P

I hope this edu post bores you, cause it sure did to me :D
I thought i might be able to make use of my education for once