OPEC Extra Cost

High Prices

High Prices

A cartel, like OPEC, increases its profit by creating a scarcity that can only be unlocked by higher prices. It works best (or worse depending on your perspective) when the product is essential and not easily substituted for. Those characteristics result in a high demand over a wide price range. The cartel endeavors to earn the highest possible profit while avoiding the constraints on price from free competition.

We have all seen over the last year and a half the plummeting price of oil, from $100+/barrel to $40/barrel. I rejoice with almost all consumers, at the decline, yet stock analysts bemoan the decline in capital investment for the energy sector. Does the loss of CapEx in 8% of the economy (energy) mean that the effect of lower oil prices is a problem for the economy?

No. The monopolistic, artificially high prices of oil contributes to higher prices on all transported goods and across the manufacturing sector. In addition, new and expanding businesses faces larger hurtles due to elevated fuel costs. Both factors dampen economic activity.

It’s not stressed enough that oil prices have weighed down the GDP growth of non-producer economies from 1973 until last year.

 

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