During class this past week we have discussed many topics that can be related to an article in the "Wall Street Journal" New Reality for Oil. These topics consist of terms of trade: maximizing a countries' welfare: small Vs. large countries and the welfare gains from trade. In the article it is said that it is now easier to stop and start production of oil regulating the risk of oversupply, much like what happened in 2014.
What happens if their is an oversupply of oil? A variety of things could potentially take place. The first of which being the price for oil falls which would hurt the terms of trade of countries who export the oil such as Saudi Arabia who is the biggest oil exporting country. Is it safe to assume that the preferences concerning oil are monotonic? In terms of it being a commodity that does potentially have an end it would be in the best interest of everyone to have an oversupply on hand. Although, this may hurt the oil companies such as a car dealership who has too many cars on the lot that aren't selling. They don't stop or slow the production of cars, instead they offer discounts on the cars to free up space on the lot.
If oil companies were to do this would that have an effect on the world price? As stated earlier there was an oversupply of oil in 2014 and by looking at this graph, you can see how that directly related to the world price of crude oil. This directly effects everyone in the oil market especially the likes of Saudi Arabia whom we can consider to be a large country.
A large country can use its power to influence the terms of trade. In this instance, Saudi Arabia exports nearly sixty percent of the worlds crude oil. A decline in the world price of crude oil such like that that occurred in 2014 can have lead to deterioration in the terms of trade of the country exporting it. This can also contribute to export biased growth if the country exports an abundance of oil than the price of the oil may fall leading to a decline in the terms of trade. This can be directly tied to the marginal utility of that product.
In the article it stated that economists believe that the oil price will stay steady at $47.02 for the next few months which is a significant cut from 2014 which was around a hundred dollars at that time. Is the oil market stabling out? Will our importing of oil help our terms of trade in the coming months? I suppose we will have to wait and see.
This market is constantly being watched as so many countries need to import oil because as you said only a few countries control the market. Seeing an over supply in oil would more than likely decrease the terms of trade of Saudi Arabia, due to the price falling. However the terms of trade for other countries importing oil would go up as they can bring in more oil for a cheaper price.
ReplyDeleteI just recently read the article, "What Really Causes Falling Productivity Growth: An Energy-Based Explanation" by Gail Tverberg. The article says that oil companies are experiencing "diminishing returns with respect to oil extraction." The article talks about how it is becoming increasingly expensive to extract and process oil. With the oil market currently overproducing and driving the price down, is it possible that we could see less importing of foreign oil and more oil extraction here in the US?
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