Tag: collusion

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Oil prices – a crude story!

Changes in the price of oil have effects throughout the economy. And it’s not just on the obvious things, such as petrol prices, energy bills and rail, bus and air fares. Most companies are significantly affected by the price of oil, as oil is a key input into their production, whether for transporting their inputs or the goods they produce, or as plastics or other petrochemicals. This is why the price of oil receives so much attention: we’re all affected by it. You will have seen the price of petrol changing dramatically over the past year or so and this is largely due to changing oil prices. The price of oil peaked at $147 a barrel in July 2008 and fell as low as $32 a barrel in December 2008.

So what is it that causes these changes in oil prices and what does it mean for the world’s economies? Read the following articles, which discuss these issues, and look at recent developments in the oil industry.

First fall in oil use since 1993 BBC News (10/6/09)
Trump’s world view Fox News, Interview between Greta van Susteren and Donald Trump (30/6/09) Oil settles above $71; China to boost reserves The Associated Press, Dirk Lammers (29/6/09)
Nigeria worries push up oil price BBC News (29/6/09)
Oil up to near $72 on dollar fall, Nigeria attack Town Hall, Pablo Gorondi (30/6/09)
Chinese demand forecast to boost oil price The Star Phoenix, Joanne Paulson (30/6/09)
Lower oil price hits Total profit BBC News (6/5/09)
Oil price hovers at $70 amid pipeline attacks Financial Times, Miles Johnson, Javier Blas, London (27/6/09)
What is going on in the oil market? BBC News (27/10/08)
Rising oil prices poses threat to recovery, Alistair Darling warns Telegraph (12/6/09)
Fears of oil crunch recede as recession knocks down global demand The Independent, Sarah Arnott (30/6/09)

Questions

  1. How is the price of oil determined? Give 2 examples of factors that could cause (a) the price of oil to increase and (b) the price of oil to decrease.
  2. How are company profits affected by the changing price of oil?
  3. OPEC is an oil cartel. What are the factors that make collusion more likely to succeed? Do they apply to OPEC?
  4. When prices of oil increase, why do we still use similar amounts of energy; still buy petrol? What’s so special about this commodity? Think about elasticity.
  5. How is the price and consumption of oil affected by the macroeconomic situation?
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A powerful oligopoly?

Energywatch, an industry watchdog, has argued in a recent report to MPs that Britain’s electricity and gas supply industry is a “comfortable oligopoly” that feels little need to innovate or compete. They have called for the sector to be subject to a Competition Commission investigation.

Power companies are ripping off consumers Times Online (21/5/08)
Age of cheap power is over Times Online (21/5/08)
Call to investigate energy ‘oligopolies’ Guardian (21/5/08)

Questions

1. Explain the main characteristics of an oligopolistic industry.
2. What aspects of the electricity and gas supply market would the Competition Commission consider if asked to investigate the industry?
3. Assess the extent to which the electricity supply industry exhibits oligopolist collusion.
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Milk – is the price the white one?

A number of UK supermarkets, including Sainsbury’s, Asda and Safeway, have been fined £116m by the Office of Fair Trading (OFT) for price fixing. The OFT is still investigating other supermarkets, including Tesco which denies that it was involved in the price collusion. The collusion is estimated to have cost consumers around £270m in higher prices.

Supermarkets fined £116m for price fixing Guardian (8/12/07)
OFT hands out £116m in fines for milk price fixing Guardian (7/12/07)
Supermarkets admit milk price fix BBC News Online (7/12/07)

Videos

Farmers reaction to price fixing claims BBC News Online

Questions

1. Explain how Sainsbury’s and the other supermarkets colluded to fix milk prices.
2. Assess the market conditions most likely to lead to price collusion in a market.
3. Examine the role of the OFT in reducing uncompetitive and restrictive practices in markets.