In view of my pathetic timed assignment 1 In view of my increasing interest in economics, I decided to post something on economics. And it has completely nothing to do with getting class participation points. Seriously. Although I wouldn't mind getting points for this too.

“Oil reaches $117 for first time

Oil prices crossed $117 a barrel for the first time after a militant group in Nigeria said it had attacked a Royal Dutch Shell-operated pipeline.

Confirmation that production had been hit revived US sweet, light crude, which had fallen more than $2 to $112.7 a barrel earlier.

The initial fall was sparked by the dollar's recovery against the euro - a turn-off for oil's foreign buyers.”

· The increase in exchange rate value of the dollar meant that it was now less beneficial for foreign buyers to purchase the oil from USA. This meant that the demand for oil from the US dropped, and assuming that supply remains the same, the equilibrium price for oil dropped from $114.7 to $112.7.

This can be illustrated by a graph.

Both the demand and supply of oil are highly inelastic, thus both curves are steep.

Demand for oil is inelastic because in the short term, even if oil prices increases, once cannot easily switch to another alternative. For example, if petrol prices increases, the consumer cannot switch to another type of fuel easily. Similarly, one would not drive further and use more petrol when price of petrol falls, thus demand for oil is inelastic.

Supply for oil is also inelastic because it is not possible to increase supply easily as the length of the production period is high, thus supply of oil is also inelastic.

In this instance, the demand for oil dropped, shifting the demand curcve leftwards form D to D¹, thus pushing the equilibrium price down.

“But supply fears and uncertainty in oil-rich Nigeria erased those declines.

New York sweet light crude closed up $1.83 at $116.96, while London Brent finished up $1.49 to $113.92 - a new all-time high.

"The bulls still hold the cards," said Mike Fitzpatrick at MF Global in New York.

Currency correlations

“Nigeria is Africa's largest oil exporter and the eighth-largest oil-producing country in the world.

Rebel attacks since early 2006 on its oil infrastructure in the Niger Delta have disabled the country's normal output by as much as a quarter.

Violence and political uncertainty in key oil-producing nations have helped the oil price notch up a series of records since the beginning of the year amid fears that supply will not be able to meet rampant demand from red-hot emerging economies in Asia, most notably China.

But analysts believe the primary driver of prices has been investors piling into oil and other commodities as a hedge against the weakening US dollar, which also makes resources cheaper for foreign investors.”

However, due to a decrease in supply of oil, the equilibrium price of oil is pushed up to a record high. The decrease in supply of oil is due to several reasons. Firstly, rebel attacks in Nigeria, which is the eighth-largest oil-producing country in the world, meant that the output of oil from Nigeria has fallen.

The rise in price of oil could also be attributed to fears that supply of oil will not be able to meet the demand for rising economies like China. Consumers, fearing that the fall in supply and rise in demand in the future will push up prices, purchase more oil at the moment, pushing up the demand and thus contributing to the rise in oil prices.

It could also be due to the loss of faith in the weakening US dollar, so investors invest in oil to diversify their risks, increasing demand for oil and thus pushing up the equilibrium price.