INTERNATIONAL OIL PRICE CRISIS: MORE THAN DEMAND AND SUPPLY MISMATCH

While the price of oil has always been an index of some nation’s prosperity, power and prestige, the recent oil imbroglio has played with fortunes Of many nations. The object of this paper is to draw the movements in the oil price and explain the reasons for the drop in international crude oil price. The paper has been divided in four parts. Section A deals with review of literature on International oil price determination. Section B estimates the empirical model Section C deals why present crisis occurred and can it be explained with demand supply analysis. Section D gives implications of this crisis. In the nineteenth century, the oil industry expanded fast in the US thanks to the “law of capture”. Effective since 1840, this law gives property rights to the owner of a well to extract unlimited amount of oil, even if it comes from someone else’s property. Gately and Huntington (2001), Krichene (2002), Cooper (2003), Altinay (2007). Hamilton (2009), Kilian (2010) and Dahl (2011) among others calculated elasticity of oil demand. The null hypothesis to be tested is whether the consumption of crude oil follows the positive income elasticity and the negative price elasticity. Today’s price in non remunerative for everyone. The only question is who will surrender first. Russia has already feeling the brunt . USA cannot continue forever. Some African countries have started leaving the race. It may create oligopoly in oil market but one thing is certain, OPEC is losing the shine.