How oil prices affect the AD of an economy of the petrol importing nations
The oil market, as well as other commodity markets, is constantly exposed to many different factors which are not always visible or palpable. The most important indicator affecting the price of oil, is the amount of supply and demand, because they influence on the price of oil. In the 1970s organization of the countries - exporters of oil (OPEC) decided to raise world oil prices that dramatically increased the incomes of petrol exporting nations. The main method of raising prices was to reduce the volume of the crude oil. It can be the illustration of the dynamics of supply and demand in the short and long term. In the short term demand and supply of oil relatively inelastic. The offer is inelastic because there is no possibility of rapid changes in the number of proven oil reserves, and its production capacity. Demand is inelastic because consumers slowed respond to changes in price.
World oil prices are formed due to the world oil demand and supply. If oil prices are very high, while demand for hydrocarbons will drop significantly, and the oil importing countries will look for alternative fuel or energy raw materials. In this case, oil-producing countries (regions) with small amounts of oil will increase their volumes. In the case of increasing oil prices, importing countries can take measures to reduce the energy intensity of national economies and the development of alternative energy sources of oil - coal and nuclear energy and renewable energy sources. In such a situation in the world market demand will fall, and the proposal increases, then will set the stage for lower oil prices. In the opposite case, when oil prices are very low, then the demand will increase and supply will decrease, so petrol exporting nations will cease to increase oil production. As a result of this incident will be created prerequisites for increasing the price of oil. Low oil prices, on the contrary stimulates demand and shrinking supply (as a result of coagulation of production and investment in high-cost regions). As a result, conditions are created for further growth in oil prices.
In the short term, perhaps permanent increase in the volume of crude oil (hydrocarbon raw materials), but to a certain level, while the consumer sector is no longer respond to the continuous rise in oil prices, this fact will lead to a decline in demand in the oil market. The demand in the short and does not react to changes in oil prices. This is due to the fact that oil is mainly used as fuel for vehicles. And if in the long run, countries may receive an impressive amount of new fuel-efficient cars or new vehicles running on alternative fuels in the short term, its impact is quite limited. Also, in different countries are taking more stringent laws to protect the environment in the light of the Kyoto Protocol and originating in certain regions of the replacement of oil to gas for power generation and new energy technologies in the future are able to significantly reduce world oil prices. This fact is very much reflected in the importing countries, and as a consequence, there will be a tax increase on the production of hydrocarbon energy raw materials, which will lead to a sharp fall in demand and the need to find alternative energy resources. This situation will radically change the balance of power source.