Home > Energy, Journalism and Economics, Microeconomics > Abnormally Normal, or Just Normal?

Abnormally Normal, or Just Normal?

I usually find articles in the Economist about the energy industry informative, but this one leaves me scratching my head:

Only rarely, says Jason Bordoff, director of Columbia University’s Centre on Global Energy Policy, has the oil market behaved like a normal market, more subject to the laws of supply and demand than to the whims of a cartel. Now is one of them.

Take supply. A year ago Saudi Arabia refused to allow OPEC to try to raise prices by pumping less crude, in the hope that a low price would drive competitors, especially America’s shale-oil producers, out of business. Since then it has used its low cost of production to carve out a bigger slice of the pie.

Question 1: Does the author mean “competitive” or “efficient” when using “normal”? It seems to me the oil market has always behaved as a typical (i.e. normal) monopolistically competitive market.

Question 2: How is a cartel’s decision to greatly increase production for the purpose of driving down prices more like a competitive market? If a single supplier (or multiple suppliers acting as a single supplier) can shift supply out, how is that different from a single supplier shifting the supply curve in?

It’s true that lower prices and higher quantities are what one would expect when a particular market transitions to a more competitive market structure. Some of what we are seeing must be attributed to more suppliers and better extraction technology. But if OPEC can still move the supply curve so effectively, in either direction, the drop in equilibrium price and increase in equilibrium quantity isn’t an indication of anything more “normal” than a normal, monopolistically competitive market structure.

  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: