Market Clearing Prices in Commodity Markets
We talk very extensively about market clearing prices in class, but the real-life implications of market clearing prices have very large effects on consumers and markets. A good example of this is in commodities markets, where the processes we use in class happen instantaneously every day in order to set prices. Commodities are goods that can be interchanged with one another, such as raw materials, and are basic goods. Perhaps the most well known commodity is oil, which is what my article writes about.
Pricing for oil is very demand driven, but it is moreso dependent on supply. Suppliers for oil include petroleum companies and the countries which petroleum companies mine for oil, and buyers include everyday consumers that need things like fuel and companies needing to produce electricity. When there is a very large supply of oil, the price for oil becomes very low due to a normal amount of demand and a very large amount of suppliers that can meet this demand. When there is a low supply of oil or a very large spike in demand for oil, the price rises very sharply. This process happens almost every day, as demand and supply constantly shift. As a result of the onset of the COVID pandemic, prices became very low however with more people demanding oil along with large amounts of inflation from printing money, prices have risen extensively for a long time. The Chevron CEO recently said this most likely would not continue, as markets would correct along with supply and demand.
The market correction coming soon to oil markets is a good example of market clearing prices, and the market clearing procedure which we reviewed in class. Here, we have certain suppliers and certain buyers, with lower oil prices representing lower market clearing prices and higher oil prices representing higher market clearing prices. When supply goes up, the producers value for the oil goes down which means that consumers would also have a lower value for oil. With lower values for oil, the price required for consumers to move producers goes down and thus oil prices goes down. The same process happens for when demand goes up, as consumers values go up and thus the market clearing price required for them to buy oil also goes up. Commodity markets in general occur in this way, showing the real-life implications of market clearing.
Articles/Sources:
https://www.cnn.com/2021/10/29/investing/gas-prices-oil-inflation-chevron/index.html
https://www.investopedia.com/terms/c/commodity.asp