Market-Power and Market Prices
- Since 2005, the production of oil in the USA has increased dramatically The price of oil has fallen from $70 per barrel to $45 per barrel. This additional production has been very expensive, with operating cost around $55 per barrel to produce. In the past, OPEC would reduce their production to maintain the higher price of $70 per barrel. OPEC has announced that their goal is to put the new production out of business and will not allow the price of oil to rise.
a) From the information above, what does OPEC expect to happen to post-2005 US oil production?
b) If Saudi Arabia is right about your answer in (a), what will happen to the price of oil? What price will that be in the short run?
c) What will be the long-run price of oil?