Discussion question, please respond to this student post. Try to use critical thinking and a narrative for your work.
We are in front of a clear case of how a substitute product can create instabilities in a mature market. As we researched in this course, recent uprises of alternatives to crude oil, like US’ shale oil and the European push for renewable energy, has put downward pressure on the price of oil if it were to follow the natural law of demand and supply. The greatest exponent of this occurred in 2014, “the price of oil decreased tremendously in a way that shocked the international market” (Deymah, 2020). Supply suddenly became way bigger than the historic demand for crude oil, and the OPEC, who was perhaps the strongest player in the oligopoly of oil, had to react accordingly.
In this sense, although initially they didn’t, “On December 7, 2018, the so-called Vienna Group, the Organization of the Petroleum Exporting Countries (OPEC) under the leadership of Saudi Arabia and its partners, above all Russia, agreed to cut production in order to shore up oil prices” (Beck, 2019).
And indeed, cutting down production is a common move in a monopoly or oligopoly environment. The monopolist or oligopolist has a market share big enough to affect prices with production decisions.
However, in contrast on the former position of OPEC in the oil industry and also in the global economic ecosystem, their influence in price is going down according to many analysts: “In terms of effective impact on the global oil price, OPEC as an organization was much less important in the 1970s than thereafter “ (Beck, 2019).
Deymah, A. (2020). The Role of OPEC in Reducing Oil Prices under International Law: The 2014 Downfall and Today’s Relevance. Journal of East Asia & International Law. 2020, Vol. 13 Issue 1, p97-119. 23p.
Beck, M. (2019). OPEC+ and Beyond: How and Why Oil Prices Are High. E-International Relationships
Economics Post Response
The post highlights mature market instabilities resulting from product substitutes. You claim that alternatives to crude oil shook its market demand and resulted in severe price fluctuations. The observation underlines oligopolistic and monopolistic market characteristics and the markets’ few to zero substitute products. As expected, the introduction of renewable energy sources into the energy industry shoved demand downwards while supply skyrocketed. To balance demand and supply, OPEC had to act quickly, slowing down production to create market scarcity and improve oil products. OPEC’s action underlined its ability to identify supply chain risk and action to mitigate risk in accordance with business goals and perspectives. OPEC’s efforts succeeded since it operated in an oligopolistic market whereby a small number of firms operate. In an oligopolistic market, all players must agree on production and supply principles to determine market dynamics. According to the post, OPEC engaged Russian, Saudi Arabian, and other major crude oil producers to cut production, limiting supply and increasing demand. OPEC could have struggled to control price independently since an oligopolistic market does not support single market player price movement and influence. As you point out in your post, both oligopolistic and monopolistic markets depend on supply shortages to increase demand and impact price upwards. You add that although OPEC influences crude oil prices, it has lost some of its market magic. I believe this change in OPEC’s control over crude oil prices relates to a drop in member numbers and market unpredictability. Additionally, OPEC seems to lose its grip on crude oil price control as member countries focus more on natural gas production. With the focus shifting to other energy sources, the oligopolistic crude oil market keeps weakening, and prices may drop permanently.