Question

The secretary general of OPEC, Ali Rodriquez, stated that it would be easier for OPEC nations to make future supply adjustments to fix oil prices that are too high, than it would be to rescue prices that are too low. Evaluate this statement.

Answer 1

A.The oil prices are a classic example of demand and supply i.e., the oil prices are determined from time to time depending on the demand and supply of the commodity.Generally,when the demand of a product rises in comparision to supply,the price of the commodity increases and vice versa.

In the case of oil also the same thing applies.But the only difference is that the volatility of global oil demand is very less.We can say that the major factor which impacts the oil price would the controlling it's supply i.e., supply side.

The OPEC which is a cartel containing a group of major oil produces usually are responsible for the oil prices.They are responsible for volatility in oil prices.They do it by controlling the supply.

Now evaluating the statement:

a.It would be easier for OPEC nations to make future supply adjustments to fix oil prices that are too high, than it would be to rescue prices that are too low.

By this statement the secretary meant that it is easier for them to increase supply wich results in decreasing the oil prices when the oil pricces are already high rather than to reduce the supply inorder to bring up the oil prices which is already at low levels

It is because capacity expansion is comparitively easier as it involves addition of capital,land,labour to the existing capacity.But utilizing the existing capacity is unhealthy to any organization as it incurs losses i.e.,any organization cannot reduce it's cost in proportion to it's output as we know there is fixed cost and not all the component of the cost is variable.

Hope this answer helps!!!