Economic Analysis: Oil Prices, Automotive Market, and Demand Dynamics

This report provides an in-depth analysis of the relationship between oil prices and the automotive market, examining the economic factors that influence car sales and consumer behavior. It begins by exploring the direct link between oil prices, particularly gasoline and petroleum, and the demand for vehicles. The report then delves into demand and supply analysis, discussing how changes in oil prices affect the demand for cars, and how global factors and market structures influence the supply side. Furthermore, it analyzes the elasticity of demand and supply in the context of oil prices and the automotive industry, considering how consumers and suppliers respond to price fluctuations. The report also investigates the effects of substitutes, such as gas-guzzlers and electric cars, on the automotive market, and concludes by emphasizing the complexity of the oil and automotive industries and the interplay of economic principles. The report highlights that the automotive market is significantly impacted by oil prices and is influenced by factors such as refining capabilities, oil reserves, and global affairs.

Organizational
Behavior and
Management

Contents
INTRODUCTION.......................................................................................................................................3
Link between Oil prices and automotive market.........................................................................................3
Demand and Supply analysis.......................................................................................................................3
Elasticity of Demand and Supply................................................................................................................4
Effects of Substitutes and Complements.....................................................................................................5
CONCLUSION...........................................................................................................................................7
REFERENCES............................................................................................................................................8

INTRODUCTION
In this discussion various points has been highlighted that makes the relation between
automotive vehicles and car products much more easier to understand and relate with each other.
Included in the discussion are various economic concepts as well, so that understanding can be
made also very simpler from basics. The discussion starts with understanding nature of relation
between oil prices and sales of cars, and how do they influence each other. Then it is followed by
use of economic concepts of demand and supply, elasticity of demand and supply, and at last
effect of substitution over relation of two commodities.
Link between Oil prices and automotive market
Gasoline and Petroleum is seen as the most frequently and most commonly used fuels inn
running of vehicles. As, both of these products are extracted from crude oil, then the prices of
crude oil are seen affecting them as well. A decrease in prices of crude oil resulting in decrease
of prices of petroleum as well, indicates that consumers making use of vehicles are now left with
more disposable income and they shall be making more expense now over these products, also
they can be make purchase of new vehicles as well. The consumers can think that, now since
they have used their current vehicle for sufficient amount of time, then the income that is saved
from decrease in prices of oil, can be used in financing their new vehicles. This decision of
consumers becomes more probable, when they try to finance their vehicles on loan and
installments. Decreased oil prices make the ownership of vehicles much more feasible for
consumers (Held, Weidmanna and et.al., 2018).
Demand and Supply analysis
Demand analysis
 The impact of prices of Oil or Gasoline and the comparatively relative products are direct
over the demand of cars in the market. This is the most common fact known in the market
that oil forms the petroleum products that is most essential and most common fuel for
cars and other vehicles as well. Besides petroleum, there is another fuel for vehicles as
well, that is diesel, which also a product that is derived from Oil only. Therefore, it is

clearly evident for even a layman as well, that relation between oil prices or crude oil
prices themselves, even if petroleum or diesel is not extracted from crude oil in the
refineries, is very direct in nature.
 Now since the relation between the two is direct, the effect of prices of Oil over demand
or vehicles in the market could be analyzed from two points. One, when prices of crude
oil rises in market and another is when prices of crude oil falls. In both the conditions, the
most favorable condition for demand of vehicles is formed when prices of crude oil falls.
This is because fall in prices of fuel means that become more available within expense
capacity of consumers and consumers can easily afford travel from cars, if they make one
time investment over buying a car. Thus, demand for cars and other personal vehicles
rises in market.
Supply Analysis
 First of all considering the supply factors and conditions for Oil market, it is well
understood that condition prevailing in Supply side of Oil are under the influence of
many other global factors. They are consisted and formed upon the turmoil and changes,
which frequently goes in global market, comprising many Political, Economic and other
factors as well. In this manner, it can be said that supply side of Oil market is highly
dynamic and vulnerable, that is why there has to be concerned and attentive eyeball all
the time. Changes in this market are seen frequently in terms of prices and production
policies. Also, there are few global players or countries as such, that are forming hold in
this market and then they make exports to rest of the world, therefore the nature of supply
is restrictive. Reserves of oil, in all over the world are very limited, and these reserves are
highly essential for supply of oil. On the other hand, demand is huge.
 Considering supply side of Car and Vehicle products, it can be said that supply of these
products are sufficiently good in market. There are many companies, which are
operational in large scale and producing a range of cars for different types of economic
and social classes of people in society. People in society also differs in nature of their
economic class depending upon their earning capacity, these classes then formed are
generally categorized in Rich, Middle-class and Underprivileged or poor ones. Various
companies operational in the market of Automotive sector are seen fulfilling the demand

of cars for all people falling in different range of economic classes in society are fulfilling
it very efficiently. However, if someone goes of understanding actual nature of supply in
the market, then it is required to understand nature of market itself, which is oligopoly.
Automotive sector is actually an oligopoly market structure, in which few companies of
really big scale are seen dominating entire market and fulfilling demand of different
through their range of products. However, they all are having their specific market shares,
but also they compete each other in true sense. Therefore, supply is highly competitive
for Cars and Vehicle products.
Elasticity of Demand and Supply
Elasticity of demand and supply
 Elasticity of demand in the general context s understood as the unit change in the demand
of vehicles and car products, and unit change happens in prices of oil. This phenomenon
of economics understand the behavior of changes in demand of one commodity in
relation to the prices of other commodity. Understanding this relation when a unit rise
happens in prices of oil, then it can be seen that this behavior is taken very seriously in
the market by the consumers. It is seen that oil is a very sensitive commodity, it is
sensitive because of its nature of usage, it is used by consumers in varied manners, from
food, to household to cars to industries and in many more spheres of life, therefore it is
very sensitive for consumers and their reaction to increase in oil prices can be very huge
and effective. Now since, consumer reaction is perceived to very effective and huge, it is
supposed that fall in demand of cars will also be very significant. Therefore, elasticity of
demand in this context is higher, or can be said to be greater than 1.
 Therefore, looking at sentiments of supply, they become very pessimistic and try to cut
down their production. However, suppliers of cars are also having very good knowledge
of fluctuations in prices of oil that happens at global level, and they know that any
increase or decrease in prices of oil do not remain for too long, and that is bound to
change after a given period. Hence, they do not cut down their production of car
immediately and wait for some time, so that price condition of oil market can recover.
However, if the condition for oil market remains this way, that prices of oil remains

higher, for a longer time, then suppliers of cars become worried for sure. Then they are
seen to cut short their production. In this way, elasticity of supply can be assumed less
than 1.
 Looking at the other way, when a unit drop happens in prices of oil, it can has been seen
that the obvious rise in demand of cars is not seen that great when prices of oil falls. This
is because, with unit decrease in prices of oil can be responsive in affordable travel for
consumers, but it does not guarantee that cars will also become cheaper for buyers. It is
noted that with existing vehicles, consumptions of fuel is increased but not demand for
cars is increased in market. Therefore, elasticity of demand is seen less than 1.
 Similarly, for the suppliers and manufacturers of cars, decrease in oil prices will be
bringing down their cost of production and thus prices of cars and the supply for the same
remains in that range only. Therefore, elasticity of supply in case of unit fall in prices of
commodities of oil is not seen that impactful on supply, hence it is less than 1.
Effects of Substitutes and Complements
While, due to lowering down of oil prices, the overall sale of automobiles or cars can be
seen increasing, especially in developed countries like United Kingdom and United States, it has
been also witnesses as a new trend in the market that, as the fuel for vehicles and cars, gas-
guzzlers are increasingly emerging, consumers are shifting their dependence to new fuel choices
in the market (Olabi, Wilberforce and Abdelkareem, 2021). Gas-Guzzlers are increasingly
becoming substitute of petroleum, diesel and other traditional fuels for vehicles. While, on the
other hand, market of Electric cars are also very active. However, this market is very new and so
far has attracted any few major players like Tesla. But, undoubtedly this can be seen as the
pioneer of future trend. The statements in this regard can be made in concrete manner because
environmental and climate issues at global level demand future generations to be lesser
dependent on fossil fuels and non-renewable sources of energy.
CONCLUSION
From the above discussion it can be concluded that, the oil industry and the mechanisms
that work in this industry forming the base of it, are rea,ly complex. Also, players that are

involved in this industry are falling influential at global scale and the manner of their functioning
also makes its marlet very complex. However, looking at nature of market of automotive
industry is as simple, but the role of oil industry bring little fractures in its simplicity. Natural
laws of supply and demand come in to play, as with any free-market, but each is impacted by the
components that make up the oil industry, such as refining capability, oil reserves, and foreign
affairs.

REFERENCES
Held, M., Weidmanna and et.al., 2018. Current challenges for sustainable product development
in the German automotive sector: A survey based status assessment. Journal of cleaner
production. 195. pp.869-889.
Olabi, A. G., Wilberforce, T. and Abdelkareem, M. A., 2021. Fuel cell application in the
automotive industry and future perspective. Energy. 214. p.118955.