Does the Oil balance Price Exist?

Many predictions and explanations are offered to the price spike in oil; speculation, rising interrogate from newly developing countries (China and India) and others. Many believed that the price will drop or reverse its gift trend after it reaches a clear threshold. When this is reached, it is assumed that the interrogate will drop, as the price will make the usage less affordable to general folks. Thus, the price will revert to balance and everybody is happy again and the usage will go back to normal, and waiting for another round of spike in the future. This is the suitable economic thinking, where the balance plays a role as attraction to the price.

However, this threshold level might not exist at all! There are some reasons to this;

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1) If oil producing countries or fellowships are behalf maximizing entities, the price expensed will not be gradual or continuous as argued by the threshold system above. Rather, it is more maximizing to set a price at a higher level and let the price adjust to the demand. In other words, instead of letting the price to adjust upward, the price is set a higher level to let it adjust downward. If the latter strategy is more profitable, why should the fellowships set the price at low level and let the consumers resolve which level to buy and which level is the threshold value?

2) In the suitable economic interrogate theory, that the interrogate curve is sloping downward to the right; as when the price increases, the interrogate of the commodity drops. That is to say the consumption be it from end consumers, or producers in the manufacturing sector, have to cut the consumption of oil. Thus, the yield has to be reduced and consequently the Gdp is to be slowed. However, having seen the ever addition price for the past two years, the drop in interrogate is no where to be seen. Rather, the addition price is accompanied by addition demand. Thus, the system that the spike might be caused by heavy industrialization might have some truth in it. And i would say the spike in oil price will be "accompanied" with more usage of oil especially from the industrializing countries such as China and India.

3) another reason that there might not be a price reversion level is the prosperity effect. Many may think that the price hike causes us to reduce our usual demand, have to adjust our budget and so on. In other words, the price hike makes us feel poorer in terms of disposal income. This is true in some extent if the country is not spellbinding send or the economies are static; the growth is slow, unemployment is high, and so on. For countries achieving 8-10% growth per annum may not feel the pinch very much, but rather the growth of price and interrogate are signs of prosperity.

Having said that, it does not mean that the price of oil defies the suitable economic interrogate theory. On the contrary, the price hike follows very much what the suitable economy has to say about the price mechanism. The interrogate curve in this case is not determined by the price alone; the interrogate curve is also determined by the prosperity, the economic growth and also the behalf seeking objective of the oil companies. The interrogate curve is shifted by these effects rather than sliding along the curve caused by the dissimilar price level. Thus, if the shift of interrogate curve outward due to these effects is larger than the sliding down along the interrogate curve due to price effect, the world interrogate will not drop although the price is high. ( we assume away the other distortions in the oil price market such as hedging and speculation) Thus I very doubt there is an balance level where the price can revert to.

Does the Oil balance Price Exist?

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