Question

Discuss the impact on the oil market if Saudi Arabia dramatically increase the quantity of oil it produces and sells each year. Specifically, address how this will effect market quantity, market price, and the amount of profit Saudi Arabia and other oil producers make selling oil. Assume that oil production is an oligopoly market where there are only a few firms and they all sell the same product (commodity).

Answer 1

Ans) Oligopoly is a market structure where there are few large sellers selling homogeneous products. If oligopoly firms are able to collude successfully, they can earn monopoly profits. That is, by restricting the output, all the firms can charge higher prices.

But it is generally seen that, in real world, oligopoly firms fail to collude. The output that they produce exceeds, due to which the market price decreases. Taking the example of OPEC and Russia, due to increased oil production from Russia, world oil prices have decreased. Due to this, Saudi has waged price war against Russia.

If Saudi Arabia increases production of oil then world output of oil will increase. Now as firms face downward sloping demand curve, with increase in quantity, global oil prices will decrease. Due to decrease in prices, profit of all the firms including Saudi will decrease. And the economy of Saudi, which is largely based on oil might get hit badly.