Sri Lankan Oil Market

8/3/2019 Sri Lankan Oil Market

1/4

Sri Lankan Oil Market

The effects of changes in the price of crude oil traded on the international petroleum market

can be heavily affecting not just for the Sri Lankan economy but for the global economy too.

A basic study of the oil market is a useful application of the principles of supply and demand

analysis and a way of understanding the interconnections between the microeconomics of the

oil market and their macroeconomic consequences.

Oil is one of the most heavily traded commodities in Sri Lanka. Fluctuating prices have important

effects for oil importers of Sri Lanka and also Sri Lanka is heavily depending on oil as a key input in

their energy for manufacturing and service industries.

Next we shall look into some statistics for oil market in Sri Lanka

01.Sri Lankan Oil Consumption (Demand)


2/4

The above diagram depicts that during the last few years the demands for the petroleum products

which are extruded from Crude Oil have been increased. There are several reasons behind increasing

demands for petroleum products which are extruded from crude oil.

y Oil is an essential input into many industries in Sri Lanka. When the economy is expanding,

the demand for oil rises. Fast growth of national output in energy-intensive sectors has led to

a surge in demand for crude oil into the Sri Lankan economy.

y There is always a speculative demand for oil. In other words purchasers hoping for a rise in

prices on world markets in the future. So the Sri Lankan consumers tend to buy up any

surplus oil futures contracts. So that demands for petroleum products increases.

Now let see how the prices of Crude oil have been varied during last few years.

When we analyzed above two graphs we can see that although the prices of Crude oil increase with

the time, demand has not decreased comparatively.


3/4

But the law of demand states that, if all other factors remain equal, the higher the price of a good,

the less people will demand that good. In other words, the higher the price, the lower the quantity

demanded.

In Sri Lankan Oil market, although the prices have gone up, demand for the petroleum products have

not decreased considerably. Reason behind this is Elasticity. The degree to which a demand or

supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products

because some products may be more essential to the consumer. Products that are necessities are

more insensitive to price changes because consumers would continue buying these products despite

price increases. Conversely, a price increase of a good or service that is considered less of a necessity

will deter more consumers because the opportunity cost of buying the product will become too high.

Oil is one of the most heavily traded commodities in Sri Lanka and one of the main energy inputs of

Sri Lanka. So petroleum products are more essential to the Sri Lankan Consumers. So the demand

characteristics of Oil market have an inelastic demand.

The following curves are the usual curves for elastic and inelastic demands for better understanding.

The supply of oil

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain

price. But unlike the law of demand, the supply relationship shows an upward slope. This means that

the higher the price, the higher the quantity supplied. Producers supply more at a higher pricebecause selling a higher quantity at higher price increases revenue.

This relationship can be clearly seen in the oil market in Sri Lanka. (See the two graphs)When the

demand for petroleum products increases, price of the barrel of crude oil has increased as it can be

seen in the graph.


4/4

Higher oil demand matches against an inelastic short run supply of oil invariably drives market prices

higher .This is shown in the diagram below.

An increase in demand causes a fall in oil stocks at the major refinery Sapugaskandha in Sri Lanka

and pushes prices higher. This acts as a signal to suppliers to expand production. However there are

time lags between a change in price and extra supplies coming on stream.

The demand for oil is also price inelastic as mentioned earlier. This combination of an inelastic

demand and supply helps to explain some of the volatility in Sri Lankan oil prices.

Documents

Sri Lankan Oil Market