Theory of Demand and Supply, Elasticity and The Impact of World Prices of Oil and Gas


The law of Demand can supply fundamentally impacts the oil and gas Industry through the determination of prices of oil and Gas. In this process the major determinants of cost of oil are are the prevailing oil prices and future expectations about change in the cost of oil and gas. On the other hand, Price elasticity helps to measure the level of responsiveness in demand to particular change in prices.  In essence, almost all measures of elasticity are negatively skewed since a raise in prices leas to a significant or slight change in demand while a drop in prices also has the same effect on the demand of the commodity concerned. For instance, looking at the aviation industry, an increase in the prices of ticket by say 20% there will be a more than the same percentage change in demand for air travel.

Factors Affecting the Elasticity of Demand and Supply

Liquefied Natural Gas is used for a number of used especially powering and providing sources of energy for other uses especially domestically. It is also used commercially in industries as an alternative source of power (Barden et al. 2009). In an instance where there is a continued increase in use and storage of Liquefied Natural Gas, its reserves are expected to depleted or become scarce. As Liquefied Natural Gas is used up, demand becomes Price Inelastic. A slight change in demand (13-12) will lead to a bigger percentage change price (7-10). As such Demand for it will fall as prices rise. At this point, it will be more expensive to buy Liquefied Natural Gas and therefore corporations and individuals alike may choose to move to other sources of energy such as oil.

Impact of Increased use and storage of LNG on world prices of oil and gas


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As the Demand for Oil Rise the Price will rise significantly (Kumar et al, 2011). This means the price of oil to be more elastic demand.

Impact of The Increased hostilities between the United States Government and the companies involved in the Nord Steam Project on world prices of oil and gas

The Nord 2 Stream Project is a mega project to build a pipeline to run from Russia to Germany. The project has seen the United States be in the logger heads with European Union Countries over what they term as interference by the United States in matters it is not subject to. In one of the points of the crisis, the United States is said to have obtained powers to   so that the ships that will be involved in building the pipeline will be subjected to United States Sanctions under a bipartisan bill presented to the United States Senate (Christie, 2016). Such Kind of crisis points has created tensions between the United States and some European Superpowers. Primarily, the companies working in these projects either in construction or consultancy are also big hitters in the Oil Industry. In addition, they are backed by mother countries based in countries such as Germany and Russia. Collision with these companies means that there will be uncertainty about future oil prices. As such, buyers would create an artificial demand leading to decreased stocks and low supply in the long-run.

Graph showing impact of continued crisis between companies involved in the Nord 2 Project and the United States

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The Supply surve shifts to the right (S1-S2) leading to a more than percentage rise in the prices (P1-P2) of Oil. However, this would be expected to stabilize in the long-run as users find other alternatives and the demand for oil. Causing oil price to be elastic.

Impact of Government Policies to reduce Ireland’s Carbon Footprint on world prices of oil.

Carbon emission has been an evasive subject in the world. This is because different countries have different standards when it comes to carbon emission. Some of these standards are also not implemented in some countries. For instance, Ireland is one of the countries that are grappling with the problem of carbon emission. It is one of the countries that are living a significant carbon foot print. However, the government has been on the fore from in making an effort to ensure that this foot print is reduced are even the situation is reverted completely. This means creation and implementation of policies to guide the country towards meeting these goals. In a nutshell, these measures are meant to help reduce the consumption of sources of energy that release a significant amount of carbon to the universe. Such a policy decreases the amount of oil and gas that is consumed in a country (Melillo et al. 2009).

Impact of Government Policies to reduce Ireland’s Carbon Footprint on world prices of oil.

Source: Author

Government Action and policies to curb carbon emissions in Ireland can cause fluctuations in oil prices. This especially true for countries who rely on manufacturing since it usually leads to government discouraging use of fossil fuels. The demand rises sharply because of the rush to buy oil which reflects in a sharp decline in supply of oil. Low supply causes prices to change in an even greater margin from (P1-P2). The demand for oil becomes elastic as a slight change in quantity leads higher percentage change in prices. That is prices tend to increase at a higher margin than the quantity of oil demanded or the amount that suppliers are willing and capable of supplying. In a nutshell relative elasticies of supply and demand are responsible for a considerable fall to how oil prices respond to increase in supply.

Considering Ireland is a cold Country, the level of energy consumption is expected to be high compare to other countries in the world. Therefore, a reduction in demand of oil and gas in Ireland is expected to impact world prices of oil and Gas. There will be more oil in world reserves due to the proportion that is not being consumed by Ireland anymore. This would have a reducing effect on the price from point ‘K’ to point `L’ of oil due to the increased supply. Thereafter, any slight change in supply of oil will have a more than the same percentage change in prices as they fluctuate up and down in the short-run before stabilizing at intersection `J’ in the long-run.



Market Failure

Market failure can be referred to as a phenomenon where is poor allocation and distribution of good and services. That is, the normal mechanisms of demand and supply do not apply anymore. Here the government may be compelled to use measures such and monetary policies and other avenues to stabilize the market. The most common tools of government intervention include tax regimes and subsidy programs.

Using Taxes and subsidies to achieve a reduction in pollution

In essence, subsidies and tax regimes aimed at providing positive externalities to the public entail the government paying for part of costs concerned to a firm (Chen et al, 2017). This means that the manufacturer can be able to produce the same commodity at a lower cost therefore availing it to the public at lower prices and it is also aimed at encouraging people to consume more. These are part of government efforts to revitalize a failing economy. From the onset, the government controls all sectors of the economy. Therefore, it has a role to play where there are issues in the economy to as to maintain a level playing ground for all market players. In economics terms, when the government introduces a subsidy in the market, it shifts the supply curve to the right. These are justified especially in the production and supply of commodities that are beneficial to all members of the society such as manufacture of medicine.

Diagram showing the impact of subsidies and tax in a failed market

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In a free market phenomenon, market players tend to forget the concept and the effect of externalities whether positive or negative. For instance, when a person decides to cycle or walk to work, they are completely oblivious of the positive contribution their action is having to the reduction of pollution. When people plant trees for commercial harvesting, they usually do so oblivious of the fact that their actions are contributing positively to the efforts of reducing global warming, and reduction of soil erosion. In addition, there is a case of under consumption for items with positive externalities as people are ignorant of the external positives, they draw from making such a decision.

For instance, Litter and garbage collection is an action that has positive externalities in the community in that it helps to reduce pollution. When litter and garbage is collected it benefits the whole society as they can enjoy a clean scenery, clean air and water which help to improve their health. In addition, Subsidies and positive taxation enables a community to enjoy a greater level of social efficiency. This is, people pay for the cost of social efficiency which excludes external benefit.  For instance, if public transportation was adequately subsidized, people would be discouraged from driving a lot which reduces the negative externalities while booting positive externalities. As people consume more of these goods and services, more firms will be encouraged to produce goods and services with positive externalities as it will cost them less.

In addition to manufacturing, agriculture is also a culprit when it comes to increase emissions. According to the World Health Organization, Food production, either from the farm or in manufacturing has become a considerable contributor with increase Greenhouse Gas emissions. For instance, Meat from ruminants and other animal products account for a higher level of greenhouse emissions.

Taxation can be used to reduce the greenhouse emissions produced from animal products. Consumption of these products has increase worldwide as the global population expands. Considering eating is a basic human need. Consumption can only be checked through the use of higher tax regimes which tend to make prices of commodities more expensive. Where prices are high demand is low and therefore there will be less pollutant emissions released to the universe. Other activities such as farming using chemical pollute water catchment areas and water sources including its availability. The government may excise it powers to increase tax on fertilizers for specific crops. This makes the fertilizers expensive discouraging farmers from using them. This prevents chemicals and other harmful substances from being washed to the water bodies. Mining makes land unavailable or leaves such parcels of land in an unusable state.

Unnecessary mining activities such as getting sand from dry river bends and other areas involve digging holes. These holes are incapable to supporting considerable economic activities. Such land is left barren due to this kind of pollution. Taxation at this juncture benefits the government and the community as the government benefits from the proceeds of taxation as the community benefits from more land for important economic activities such as farming. For instance, the Norwegian government introduced a subsidy and taxation regime where it ensures the average level of calories in food. For instance, it is able to ensure that citizens can have new food with a similar level of calorie as the current food. Research has shown that useful emission targets can be achieved with just a few changes in the feeding pattern and amount of food taken.

On the other hand, there are international companies that are used to dumping their obsolete and unwanted products in other countries especially third word and developing countries (West, 2004). For instance, there are tons and tons of electronic waste that is sold to the people of Africa, South America and South Asia without their knowledge that such items have a very short lifespan left. These countries lack the fundamental tools and equipments of disposing off these items when they come to the end of their useful life. There are therefore piles and piles of electronic waste lying allover dumpsites in the affected countries. These heaps become sources of environmental pollution and sources of dangerous diseases (Metcalf, 2009).

Taxes and subsidies can be used to supplement each other when trying to control pollution and environmental degrading caused by activities such as dumping. Taxes can be used in form of tariffs for incoming imports to the country. This means it becomes more expensive to import and sell a commodity in a country, Importers therefore shun from cheap unwanted goods in favor of localize or tax exempted products from particular countries. On the other hand, subsidies help local companied to compete at the same level as international countries. They can be able to produce at a lower cost (Abadie et al, 2016). This means Goods from outside will be impossible to penetrate and have a grip on the market.




Barden, J., Pepper, W., & Aggarwal, V. (2009). The impact of high oil prices on global and regional natural gas and LNG markets. The Energy Journal, 30(Special Issue).

Chen, Y. H., Wen, X. W., Wang, B., & Nie, P. Y. (2017). Agricultural pollution and regulation: How to subsidize agriculture?. Journal of cleaner production, 164, 258-264.

Christie, E. H. (2016). The design and impact of Western economic sanctions against Russia. The RUSI Journal, 161(3), 52-64.

Kumar, S., Kwon, H. T., Choi, K. H., Lim, W., Cho, J. H., Tak, K., & Moon, I. (2011). LNG: An eco-friendly cryogenic fuel for sustainable development. Applied energy, 88(12), 4264-4273.

Metcalf, G. E. (2009). Tax policies for low-carbon technologies (No. w15054). National Bureau of Economic Research.

Melillo, J. M., Gurgel, A. C., Kicklighter, D. W., Reilly, J. M., Cronin, T. W., Felzer, B. S., … & Wang, X. (2009). Unintended environmental consequences of a global biofuels program.

West, S. E. (2004). Distributional effects of alternative vehicle pollution control policies. Journal of public Economics, 88(3-4), 735-757.

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