PETROLEUM ECONOMICS
• Delivered by Edward Male
• Email: malesedwards@[Link]
SUGGESTED REFERENCES
• Jean Manseron, , Petroleum Economics, 4th edition, Editions Technip
• Paris
• Rognuldur Hannesson 1998, Petroleum: Issues and strategies for and
natural gas production, Quorum Publishers.
• Alderman, M.a 1972. The world Petroleum Market: Baltimore, John
Hopkins University Press
• Jones, P.E., 1988. Oil – A practical Guide to the economy of world
Petroleum Cambridge Press, Wood-head. Faulker
Economics concepts
• The dictionary defines it as „the science dealing with the production,
distribution and consumption of wealth – goods and services.
• It is a social science that studies the allocation of scarce resources and
choice.
• The study of how society decides what, how, and for whom to
produce.
CONT’
• Economics studies are subdivided into macroeconomics and
microeconomics.
• Macroeconomics emphasizes the interactions in the economy as a
whole e.g. national income, inflation, employment levels,
international trade, the general price levels and factors influencing it.
• Micro analysis is the study of the economics at an individual, group or
company level. It offers a detailed treatment of individual decisions
about particular commodities. e.g. a certain company setting its
prices for different products.
Definition of terms
• A scarce resource is one for which the demand is greater than the
available supply. E.g. Fertile land for the population to grow food.
A market is a set of arrangements by which buyers and sellers are in
contact to exchange goods and services.
• Demand is the quantity of a good buyers wish to purchase at each
conceivable price.
• Demand curve shows the relation between price and quantity
demanded, holding other things constant.
Definition of terms
• Supply is the quantity of a good sellers wish to sell at each
conceivable price.
• Supply curve shows the relation between price and quantity supplied,
holding other things constant.
• The Equilibrium price is the price at which the quantity supplied
equals the quantity demanded.
Demand curve
Demand curve assumptions
1. The number of consumers stays constant.
2. The consumer’s tastes, money, income and need stays constant.
3. The prices of other related commodities remain unchanged.
The concept of demand
Quantity demanded (Qd) is the total amount of a good that buyers
would choose to purchase under given conditions.
The given conditions include:
• price of the good
• income and wealth
• prices of substitutes and complements
• population
• preferences (tastes)
• expectations of future prices
CONT’
• The Law of Demand states that when the price of a good rises, and
everything else remains the same, the quantity of the good
demanded will fall.
• In short, ↑P →↓Qd
• A Demand Curve is a graphical representation of the relationship
between price and quantity demanded (ceteris paribus). It is a curve
or line, each point of which is a price-Qd pair. That point shows the
amount of the good buyers would choose to buy at that price.
• Changes in demand or shifts in demand occur when one of the
determinants of demand other than price changes.
CONT’
Causes of the demand to change or shift
• The price of a substitute good drops. This implies a leftward shift.
• The price of a complement good drops. This implies a rightward shift.
• Incomes increase. This implies a rightward shift (for most goods).
• Preferences change. This could cause a shift in either direction,
depending on how preferences change. E.g Change in tastes and
preferences of the consumers in favour of the commodity will shift the
demand curve of the commodity to the right.
The concept of supply
Quantity supplied (Qs) is the total amount of a good that sellers would
choose to produce and sell under given conditions. The given
conditions include:
• price of the good
• prices of factors of production (labor, capital)
• prices of alternative products the firm could produce
• technology
• productive capacity
• expectations of future prices
The law of supply
• The Law of Supply states that “when the price of a good rises, and
everything else remains the same, the quantity of the good supplied
will also rise.”
• In short, ↑P →↑Qs
• A Supply Curve is a graphical representation of the relationship
between price and quantity supplied (ceteris paribus). It is a curve or
line, each point of which is a price-Qs pair. That point shows the
amount of the good sellers would choose to sell at that price
Shift in supply
Changes in supply or shifts in supply occur when one of the
determinants of supply other than price changes.
Examples:
[Link] price of a factor of production rises. This would cause a leftward
shift the supply curve.
2.A rise in the price of an alternative good that could be provided with
the same resources. This implies a leftward shift of supply.
[Link] improvement in technology. This leads to a rightward shift of
supply.
Supply curve
Supply Curve Assumptions:
• The number and size of producers remain same.
• The technology to produce the commodity is unchanged.
• The factor price (cost involved in producing a commodity) is unchanged.
• Prices of the related commodities remain unchanged.
Elasticity of demand and supply
• The price elasticity of demand is the percentage change in the quantity of a good
demanded, divided by the corresponding percentage change in price.
• If price elasticity is greater than 1, the good is elastic i.e. quantity changes faster
than price
• If price elasticity less than 1, it is inelastic. i.e. quantity changes slower than price.
• If a good’s price elasticity is 0 (no amount of price change produces a change in
demand), it is perfectly inelastic.
• If it is equals to 1, its Unitary elasticity (price change leads to an equal percentage
change in demand)
Ed = % Change in Quantity demanded
% Change in Price
Cont’
• The Elasticity of Supply measures the responsiveness of the quantity
supplied to a percentage change in the price of that commodity.
• Es = % Change in Quantity Supplied
% Change in Price
• Elasticity of Supply is always positive.
• The more elastic is supply, the larger the percentage increase in
quantity supplied in response to a given percentage in price.
• Elastic supply curves are relatively flat and inelastic supply curves
relatively steep.
Constructing the market
• Putting demand and supply together, we can find an equilibrium
where the supply and demand curve cross.
• The equilibrium consists of an equilibrium price P* and an equilibrium
quantity Q*. The equilibrium must satisfy the market-clearing
condition, which is Qd = Qs.
Cont’
• Mathematical example
• Suppose P = 20 - 0.1Qd and P = 5 +0.05Qs.
• In equilibrium, Qd = Qs, so we have a system of equations.
• Solve for Q like so: 20 - 0.1Q = 5 + 0.05Q,
• 15 = 0.15Q, Q* = 100.
• Then plug Q* into either equation:
• P = 20 - 0.1(100) = 10.
• So the market equilibrium is P* = 10, Q* = 100.
