Review Questions #1
1. Explain the diﬀerence between posted prices and transactions in the era (especially pre-World War II) before there was a world market for crude oil with market transactions. Why might it be nonsensical to treat posted prices as transactions prices in a quantitative analysis of oil markets?
2. What features of the production technology for crude oil and the characteristics of oil demand would naturally lead to volatile market prices? 3. When will the world run out of crude oil? When will it run out of $25 crude oil? $100 crude oil? Be sure to use comparative cost in your response.
4. Explain why a resource cartel’s power to inﬂuence the market price is related to the fraction of the market supplied by the cartel. Would increasing the cartel’s proportion of the market supplied by adding new cartel members necessarily make the cartel more successful? (Is coordination costless?)
5. Explain why the incentives of cartel members to undermine a cartel are directly related to the success of the cartel. What other factors work to make the cartel less successful through time?
6. List several of the world’s countries with the largest crude oil consumption. Do the same for production. And for net exports and imports. 7. Explain why crude oil is usually shipped long distances rather than ﬁnal products.
8. How does composition of crude oil demand in the US diﬀer from most countries in the rest of the world? How does this aﬀect the reﬁning sector in the US relative to the rest of the world?
9. In what way was OPEC modeled after the Texas Railroad Commission? OPEC is sometimes referred to as a ‘clumsy cartel’. Why? What factors tend to make OPEC less successful than the Texas Railroad Commission in pro-rationing oil production among its members? 10. In the post-World War II era, crude oil prices fell and output increased reﬂecting the increasing abundance of oil. But after the early 1970s oil prices increased dramatically and output fell. Was this...
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