Economics

The article written by David Barker on the Chronicle tells us how it is unusual for today to have a recession and also to have high oil and gasoline prices. He stated that most economists and analysts are bothered by the fact that this indicated another fuel-price increase in the coming months and years. In our worst recession months, oil was priced globally at almost 62 and it was also observed that the potential of increasing is still not going down. Baker (2009) said that comparing this price to last years price of 146 per barrel we can still say that the prices for today are low although he states that this 62 price is already two times the price of the historical average of petroleum which should only be priced around 20-30 per barrel. However on another perspective, it was noted that oil traders are predicting that the recession in already coming to its end. This means that there will recovery after the recession and this will push the demands once again.

Baker (2009) acknowledged that since the world is in recession, and prices are still up high then we dont know really what to expect when the economy recovers once again. Miss Judy Dugan also that this scenario only means that investors and speculators are still in control of oil commodities and unless there are strict provisions then we can expect another oil price hike. Back in Washington, Baker (2006) confirmed that there continued efforts of approving the Global warming bill that will have limits and coverage for the functions of oil investors who were primarily the reasons for the unstable high pricing of oil in the previous year. Rep. Bart Stupak who is one of the authors of the provision said that our position for this year is Really confusing because we are at the middle of the recession, supply is at a 20-year-high, demand is at a 10-year low, yet oil prices are up 70 percent since the beginning of the year. He also moved on to clearly state that this scenario cannot be explained by plain supply and demand concepts.

In order to analyse this scenario, the concept of supply and demand must first be explained. Basically, consumers show their desire for goods and services by purchasing them. Stated simply, demand refers to the amounts of goods andor service that consumers are both willing and able to purchase. What is the relationship between the quantities demanded of a commodity and its own price If a price of a denim pants is 30, how many pairs are we inclined to purchase when its price is 50 The law of demand asserts that the quality demanded of a good andor service is negatively or inversely related to its own price (Branson, 1981). There are two reasons why price and quantity is inversely related. Price is an obstacle to consumption. The higher the price of a good, the greater is its opportunity cost in terms of other goods that must be given up and therefore the fewer consumers would want to buy of the item. (Mabry and Ulbrich, 1989). The second reason for the negative relationship between price and quantity demanded has to do with our budget as consumers. Paying a higher price for some amount of a commodity effectively reduces our income.

According to Branson (1981), the definition of recession is the universal slow-down of economic activity over a period of time with the coupled raises in bankruptcies and unemployment. Recessions impact businesses, living standards, and political policies. Since recession is also described a drop in the spending activities of an economy, it can be theoretically predicted that after andor during a recession the supply of goods will increase and additionally the price will go down. However when we relate this to the scenario of the oil price hikes over the past two years we can see that it does not fit in well with the anticipated supply and demand relationships. We can take a look at this situation by having an insight to the concept of supply which is the law of supply states that quantity supplied is positively related to price. Higher prices also act as signals to producers that consumers value their goods highly and desire more of them (Mabry and Ulbrich, 1989). Going back to the supply and demand of oil price hikes, here is recent graph showing the comparison of world oil prices over the years

The governments have a set rules and approaches on how to deal with recession. These policies are often termed as stabilization policies. These involve financial adjustments and the creation of policies in order to bolster demand and advocate more investments for increased economic growth (Branson, 1981). They can also set floor prices and ceiling prices for certain commodities.

Furthermore, in answering the question, If oil costs this much now, when demand is low and supply is high, what happens when the economy improves Well, in my opinion, prices will of oil will decrease slowly but sure once the economy gets back on tract. This is mainly because of the surplus that will be created because of the low demand on the previous years and even though demand increases, there is still a huge amount of supply that can be accessed and since the global market is connected to the USA we can expect there after the recession is over all prices of commodities will go back to normal.