OPEC produce roughly 40% of the worlds oil, therefore if all the remaining producers were able they would massively increase supply and decrease OPEC market share, with a big enough response the price of oil would approach competitive allocation. OPEC must therefore take into account non-members when setting the price. Salant’s model argues that due to the presence of a competitive fringe the cartel must set the price lower than the monopoly price, reduce output and let the price rise rapidly. This implies that the cartel raises the present value of the competitive fringe by a greater value than the present value of cartels. This empowers those without power, as in order to keep the price high the cartel must reduce production whereas the unconstrained
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When the world economy grows, so should the oil demand especially income growth in developing economies. The income elasticity of oil demand also displays the sensitivity of oil prices to changes in the business cycle, the more elastic the income elasticity of demand the greater volatility in prices in response to booms and recessions, this was seen in the dramatic weakening in the cartel in 1983 recession, then again in a significant fall in prices was seen in the aftermath of the crash in 2008. A recession leads to a fall in demand for oil, this pressurises the cartel into lowering prices and raising output, therefore reducing profits. The Chinese Markets fell 14% in the first 18 days of 2016 as a result of fears over potential growth, this combined with a strong dollar which increase the price of oil in overseas territories has created concerns that oil demand will further weaken. With weak global demand it is unlikely that an investment in North Sea oil will prove profitable, especially considering the increased supply to the global …show more content…
The FPC imposed price ceilings on natural gas, this prevented prices from reaching natural levels resulting in increased consumption due to a reduction in conservation incentives. Furthermore the possibility of controls being lifted with a change in the political process, lead producers to leave gas in the ground waiting for higher future prices. These price controls were only placed on gas that crossed state lines, therefore gas produced and sold in the state received a higher price than instate oil. Congress viewed scarcity rent as a possible source to transfer revenue from the producers to the consumers, however failing to realise that scarcity rent is an opportunity cost that protects future consumers. Therefore the case of natural gas show, consumers are willing to pay higher prices when faced with
When the world economy grows, so should the oil demand especially income growth in developing economies. The income elasticity of oil demand also displays the sensitivity of oil prices to changes in the business cycle, the more elastic the income elasticity of demand the greater volatility in prices in response to booms and recessions, this was seen in the dramatic weakening in the cartel in 1983 recession, then again in a significant fall in prices was seen in the aftermath of the crash in 2008. A recession leads to a fall in demand for oil, this pressurises the cartel into lowering prices and raising output, therefore reducing profits. The Chinese Markets fell 14% in the first 18 days of 2016 as a result of fears over potential growth, this combined with a strong dollar which increase the price of oil in overseas territories has created concerns that oil demand will further weaken. With weak global demand it is unlikely that an investment in North Sea oil will prove profitable, especially considering the increased supply to the global …show more content…
The FPC imposed price ceilings on natural gas, this prevented prices from reaching natural levels resulting in increased consumption due to a reduction in conservation incentives. Furthermore the possibility of controls being lifted with a change in the political process, lead producers to leave gas in the ground waiting for higher future prices. These price controls were only placed on gas that crossed state lines, therefore gas produced and sold in the state received a higher price than instate oil. Congress viewed scarcity rent as a possible source to transfer revenue from the producers to the consumers, however failing to realise that scarcity rent is an opportunity cost that protects future consumers. Therefore the case of natural gas show, consumers are willing to pay higher prices when faced with