PROBABLY 200-300 YEARS AGO CRUDE WAS PRESENT IN ABUNDANCE BUT NOW THERE IS A SHORTAGE OF OIL ALL AROUND WORLD AND CAREFUL ATTENTION NEEDS TO BE PAID IN ORDER TO ENSURE THAT OIL IS USED EFFICCIENTLY AND THERE IS NO WASTAGE.IN TODAYS WORLD, MOST OF THE WORK IS DONE THROUGH MACHINES.MOST OF THEM WORK ON ELECTRICITY BUT A VAST MAJORITY OF THEM ALSO REQUIRE OIL FOR THEIR WORKING.DUE TO AN INCREASE IN POPULATION THERE IS IN AN INCREASE IN THE NUMBER OF VEHICLES ON THE ROAD, THEREFORE THERE IS GREAT PRESSURE ON THE OIL PRODUCING COUNTRIES TO ENHANCE THE OUTPUT SO THAT THEY CAN INCREASE THE AMOUNT TO BE EXPORTED.

THE NATURE OIL MARKET

IN MOST COUNTRIES THERE IS A CONTESTIBLE MARKET WHERE IN THERE IS A MIXTURE OF DIFFERENT TYPES OF MARKETS:

1) MONOPOLY- IS A MARKET THAT IS CONTROLLED BY A SINGLE SELLER.

2) DUOPOLY-IS MARKET THAT IS CONTROLLED BY TWO SELLERS, IN MOST CASES IT IS A GOVERMENT-RUN ENTERPRISE AND PRIVATE ENTITY.

3) OLIGOPOLY-IS A TYPE OF MARKET IN WHICH THERE IS FIERCE COMPETITION BETWEEN VARIOUS FIRMS.FOR EXAMPLE AUTOMOTIVE INDUSTRIES,NETWORK RETAILERS ETC

AN OLIGOLPOLISTIC MARKET

AN OLIGOPOLISTIC MARKET IS A MARKET IN WHICH THERE ARE MANY COMPETITORS IN THE MARKET COMPETING FOR MONOPOLY IN A MARKET. NAMELY THERE ARE TWO TYPES OF OLIGOPOLISTIC MARKETS COLLUSIVE AND NON COLLUSIVE OLIGOPOLY.

COLLUSIVE OLIGOPOLY

IT IS A FORM OF MARKET WHERE IN ALL THE MAJOR FIRMS REACH TO A CONSENSUS THAT SINCE INTENSE COMPETITION WILL LEAD TO HUGE LOSSES, THEY FORM GROUPS OR CARTELS. HERE FIRMS ARE INTERDEPENDENT ON EACH OTHER. THER IS NON-PRICE COMPETITON AND NO FIRM CAN BREAK THE RULES OF A CARTEL AND EACH SELLS OIL AT THE SAME PRICE LEVEL.

NON-COLLUSIVE OLIGOPOLY

IT IS A FORM OF OLIGOPOLY WHERE THE FIRMS WHICH FORM THE CARTEL DECIDE TO BREAK IT BY VIOLATING THE RULE AGREED DURING THE FORMATION OF CARTELS. THEY BREAK THE CARTELS FORMED AND START PRICE COMPETITON AND THE FIRM WHICH CAN BARE THE LOSSES FOR MAXIMUM AMOUNT OF TIME GAINS MONOPOLY.

Figure 1: Figure 1: IN AN OLIGOPOLISTIC MARKET PRICE DROPS IN ORDER TO INCREASE THE QUANTITY SOLD BUT THEN DUE TO LOSSES COMPANIES FORM CARTEL GROUS AND KEEP PRICE AND QUANTITY SUPPLIED THE SAME.HERE THE Y AXIS REPRESENTS PRICE WHILE THE X AXIS REPRESENTS QUANTITY SUPPLIED.

AN OLIGOPOLISTIC MARKET IS THE BEST MARKET FOR ANY TYPE OF COUNTRY SINCE IT HAS A LOT OF BENFITS.

  1. IT HELPS TO INCREASE COMPETITION.
  2. AN INCREASE IN COMPETITION HELPS IN THE INNOVATION OF NEW TECHNIQUES.
  3. INNOVATION OF NEW TECHNOLOGIES WILL LEAD TO IMPROVEMENT IN THE QUANTITY AND QUALITY OF THE COMMODITY.
  4. INNOVATION LEADS TO BETTER EFFICIENCY IN MOST CASES WHICH IN TURN HELPS IN MAKING PROFIT.
  5. PROFIT HELPS IN GROWTH OF A BUSINESS WHICH IN TURNS HELPS THE BUSINESS TO DIVERSIIFY.
  6. DIVERSIFICATION HELPS IN REDUCING THE RISK FACTOR INVOLVED IN THE BUSINESS AS EVEN IF ONE SECTOR IS MAKING A LOSS THE OTHER SECTOR WON'T GET AFFECTED.

THE DEMAND AND SUPPLY MECHANISM

THE OIL MARKET IS OLIGOPOLISTIC AND THERE ARE QUITE A FEW COUNTRIES WHO REFINE OIL AND EXPORT IT TO VARIOUS OTHER COUNTRIES IN DIFFERENT FORMS.THE COMPETITION FACE BY COMPANIES IN AN OLIGOPOLISTIC MARKET IS VERY SEVERE.THE ONE POLICY FOLL0WED BY COMPANIES IN AN OLIGOPOLISTIC MARKET IS THAT OF LOWERING THE PRICE OF THEIR GOODS AND INCREASE MARKET SHARE.THIS IS DONE TO AVOID COMPETITION AND IF ALL THE COMPANIES CONTINUE TO REDUCE THE PRICE OF THEIR GOODS THEY WILL FACE LOSSES AND THERE WOULD BE SHORTAGE OF THE PRODUCT IN THIS CASE OIL.

BUT IF A MAJOR OIL PRODUCING COUNTRY LIKE VENEZUELA STOPS ITS PRODUCTION FOR DAYS THEN THE REQUIREMENT CANT BE MET OUT AND THERE MIGHT BE SHORTAGE.SUCH A DECREASE IN OUTPUT WILL LEAD TO INCREASE IN PRICE OF OIL.IF THE PRICE OF OIL INCREASES PRODUCERS WILL BE ENCOURAGED TO PRODUCE MORE AND THIS IN TURN WOULD LEAD TO A GLUT IN THE MARKET.AN EXCESS SUPPLY IN THE MARKET WILL FURTHER LOWER THE PRICES, SO IN ORDER TO MAINTAIN REVENUE FIXED AMOUNT OF PETROL NEEDS TO BE PRODUCED EVERYDAY SO THAT IT IS AFFORDABLE TO THE PRODUCERS AND CONSUMERS ALIKE.

OIL BEING A VOLATILE SUBSTANCE, SEES MAXIMUM CHANGE IN PRICE.IT SUCH A VOLATILE COMMODITY THAT IN THE LAST TWO MONTHS THE PRICE OF CRUDE PER BARREL HAS FALLEN BY ALMOST $95 PER BARREL (FROM $130 PER BARREL FROM MID NOVEMBER TO $42 AT THE START OF JANUARY 2009).ISO JUST IN A GAP OF ABOUT 2 MONTHS THE PRICE OF PETROL HAS CHANGED SO DRASTICALLY, VENEZUELA SHOULD REALIZE HE SITUATION AND ALSO BECAUSE THERE WAS A 58 US CENT INCREASE IN THE PRICE OF PETROL JUST IN THE FIRST DAY OF STRIKE.VENEZUELA SHOULD REALIZE THAT STRIKE IS NO SOLUTION TO ANY PROBLEM.THIS TIME THE CONSEQUENCES ARE NOT ONLY SUFFERED BY THE COUNTRY BUT ALSO A MAJOR PART OF THE WORLD WHICH IS DEPENDENT ON VENEZUELA FOR THEIR OIL.OIL MOREOVER THE TRADERS ARE FRETFUL ABOUT WHAT THE LONG TERM IMPACT OF HUGO CHAVEZ'S DISMISSAL ON THE PRODUCTION OF OIL IN THE COUNTRY.IN SUCH CASES IT IS OFTEN SEEN THAT TRADING ON THESE COMMODITIES GOES DOWN AS PEOPLE DONT SEEM TO HAVE THE SAME CONFIDENCE ON THE NEW REGIME AS THEY HAD ON THE OLDER ONE.FOR EXAMPLE WHEN NEWS OF THE SATYAM FRAUD CAME TO LIGHT TRADING OF ITS SSTOCKS HAD FALLEN BY 85% IN A SINGLE DAY AND IT WAS NOT UNTIL MONDAY THAT THE SATYAM STOCKS STARTED GAINING ONCE THE GOVERNMENT ELECTED AN ELITE BOARD OF DIRECTORS.HOWEVER DOMESTIC MARKETS DONT FEEL THE HEAT BUT SUCH CASES HAMPER THE ECONOMIC GROWTH OF THE COUNTRY AND LESSEN FOREIGN INVESTMENT INTO THE COUNTRY THEREBY DAMAGING THEIR GLOBAL CORPORATE IMAGE. IT IS OFTEN SEEN THAT THE SELLING CAPACITY OF THESE FIRMS GOES DOWN AS PEOPLE ARE UNCERTAIN AS TO WHETHER THERE DEMANDS WILL BE HEEDED TO IN TIME OR WILL THEY HAVE TO FACE CRISIS.

CONCLUSION

SINCE ALTERATION IN THE AMOUNT OF OIL PRODUCE AFFECTS NOT ONLY THE PRODUCERS BUT ALSO THE SUPPLIERS, THERE SHOULD BE CONSTANT SUPPLY OF OIL SO THAT THE PRICE REMAINS STABLE. THIS WILL HELP THE PRODUCER AS WELL AS CONSUMERS REEP BENEFIT AS CONSTANT OIL SUPPLY WILL MEAN FAIR PRICE FOR CONSUMERS WHILE THE PRODUCERS WILL GAIN CONSTANT BENEFITS SINCE THE DEMAND WILL BE CONSTANT. OIL BEING A VOLATILE GOOD, GETS GREATLY AFFECT IF EITHER THE DEMAND OR SUPPLY FLUCTUATES, SO IN THE INTEREST OF BOTH SIDES IT WOULD BE BETTER IF FIRMS PRODUCED COLLUSIVELY THUS MINIMIZING LOSSES INCURRED DURING PRODUCTION.

Source: Essay UK - http://turkiyegoz.com/free-essays/economics/economics-commentary.php


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