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Posts Tagged ‘marginal revenue’

The oil industry and low oil prices

Oil prices will remain below $60 per barrel for the foreseeable future. At least this is what is being assumed by most oil producing companies. In the more distant future, prices may rise as investment in fracking, tar sands and new wells dries up. In meantime, however, marginal costs are sufficiently low as to make it economically viable to continue extracting oil from most sources at current prices.

The low prices are partly the result of increases in supply from large-scale investment in new sources of oil over the past few years and increased output by OPEC. They are also partly the result of falling demand from China.

But are low prices all bad news for the oil industry? It depends on the sector of the industry. Extraction and exploration may be having a hard time; but downstream, the refining, petrochemicals, distribution and retail sectors are benefiting from the lower costs of crude oil. For the big integrated oil companies, such as BP, the overall effect may not be as detrimental as the profits from oil production suggest.

Articles
BP – low oil price isn’t all bad new BBC News, Kamal Ahmed (27/10/15)
Want to See Who’s Happy About Low Oil Prices? Look at Refiners Bloomberg, Dan Murtaugh (31/10/15)
Low prices are crushing Canada’s oil sands industry. Shell’s the latest casualty. Vox, Brad Plumer (28/10/15)

Data
Brent spot crude oil prices US Energy Information Administration
BP Quarterly results and webcast BP

Questions

  1. Why have oil prices fallen?
  2. What is likely to happen to the supply of oil (a) over the next three years; (b) in the longer term?
  3. Draw a diagram with average and marginal costs and revenue to show why it may be profitable to continue producing oil in the short run at $50 per barrel. Why may it not be profitable to invest in new sources of supply if the price remains at current levels?
  4. Find out in what downstream sectors BP is involved and what has happened to its profits in these sectors.
  5. Draw a diagram with average and marginal costs and revenue to show why profits may be increasing from the wholesaling of petrol and diesel to filling stations.
  6. How is price elasticity of demand relevant to the profitablity of downstream sectors in the context of falling costs?
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Prosumers and a new ‘free’ market paradigm

Profits are maximised where marginal cost equals marginal revenue. And in a perfectly competitive market, where price equals marginal revenue, profits are maximised where marginal cost equals price. But what if marginal cost equals zero? Should the competitive profit-maximising firm give the product away? Or is there simply no opportunity for making a profit when there is a high degree of competition?

This is the dilemma considered in the articles linked below. According to Jeremy Rifkin, what we are seeing is the development of technologies that have indeed pushed marginal cost to zero, or close to it, in a large number of sectors of the economy. For example, information can be distributed over the Internet at little or no cost, other than the time of the distributor who is often willing to do this freely in a spirit of sharing. What many people are becoming, says Rifkin, are ‘prosumers’: producing, sharing and consuming.

Over the past decade millions of consumers have become prosumers, producing and sharing music, videos, news, and knowledge at near-zero marginal cost and nearly for free, shrinking revenues in the music, newspaper and book-publishing industries.

What was once confined to a limited number of industries – music, photography, news, publishing and entertainment – is now spreading.

A new economic paradigm – the collaborative commons – has leaped onto the world stage as a powerful challenger to the capitalist market.

A growing legion of prosumers is producing and sharing information, not only knowledge, news and entertainment, but also renewable energy, 3D printed products and online college courses at near-zero marginal cost on the collaborative commons. They are even sharing cars, homes, clothes and tools, entirely bypassing the conventional capitalist market.

So is a collaborative commons a new paradigm that can replace capitalism in a large number of sectors? Are we gradually becoming sharers? And elsewhere, are we becoming swappers?

Articles
Capitalism is making way for the age of free The Guardian, Jeremy Rifkin (31/3/14)
The End of the Capitalist Era, and What Comes Next Huffington Post, Jeremy Rifkin (1/4/14)
Has the Post-Capitalist Economy Finally Arrived? Working Knowledge, James Heskett (2/4/14)

Questions

  1. In what aspects of your life are you a prosumer? Is this type of behaviour typical of what has always gone on in families and society?
  2. If marginal cost is zero, why may average cost be well above zero? Illustrate with a diagram.
  3. Could a monopolist make a profit if marginal cost was zero? Again, illustrate with a diagram.
  4. Is it desirable for there to be temporary monopoly profits for inventors of new products and services?
  5. What is meant by a ‘collaborative commons’? Do you participate in such a commons and, if so, how and why?
  6. Should tweets and Facebook posts be regarded as output?
  7. What is meant by an internet-of-things infrastructure?
  8. What are the incentives for authors to contribute to Wikipedia?
  9. Could marginal cost ever be zero for new physical products?
  10. Think about the things you buy in the supermarket. Could any of these be produced at zero marginal cost?
  11. How can capitalists make profits as ‘aggregators of network services and solutions’?
  12. Provide a critique of Rifkin’s arguments.
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