The Price Of West Texas Intermediate

1494 Words6 Pages
When faced with a downward sloping demand curve, a firm is said to have some degree of market power and will therefore produce to the point where marginal cost equals marginal revenue in order to maximize profit. In other words, if a firm is producing too much of a good and selling it at too low of a price point, the firm will scale back production in order to sell at a higher price. Beginning June 2014, the price of West Texas Intermediate (WTI) crude has dropped from $105 per barrel to where it is now currently priced at $42 per barrel on November 2015, constituting a price decrease of more than 60% over a period of eighteen months. This price drop is due to an increase in oil production primarily coming from Saudi Arabia and Iraq along with the American shale plays that is causing an outward shift in the global supply of crude oil. With the short term demand for oil being inelastic, a moderate increase in supply will cause a large decrease in the market price. Basic intuition of an oil producing firm with enough market power to face a downward sloping demand schedule, OPEC, would have it so production is scaled back in order to drive prices back up to former levels, however, this is not the case of what happened. OPEC, along with its lead producing country, Saudi Arabia, has been producing at their maximum production capacity in order to saturate the market as much as possible and drive oil prices down even lower. The Organization of Petroleum Exporting Countries,
Open Document