There is an anticipation that India and Pakistan border tensions over Jammu and Kashmir would rise in future and a war is foreseen. What changes will you see in the demand of oil?
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: Increase in demand
In the case of rising tensions or the anticipation of war, the demand for oil is likely to increase. This is because:
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War preparedness would lead to higher fuel consumption for military purposes.
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Economic uncertainty often drives countries to stockpile oil as a precautionary measure.
Changes in the demand of a commodity can be categorised into 2 categories:
- Shift in the demand curve: When change in the demand is due to change in factors other than the own price of commodity.
- Movement along the demand curve: When change in demand is due to change in the own price of the commodity.
Now, as the change in demand of oil is due to "War", which is a factor other than the price, that means, there will be an increase in demand of oil. Had it been a situation where the demand had risen due to fall in price, we would have called it extension of demand.