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 oil cartel endeavors to earn the highest possible profit while avoiding the downward pressure on price that free competition would involve.

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 capital expenditures for the 8% of the economy that is energy mean that the effect of lower of prices is a problem for the economy?

No. The monopolistic, artificially high price of oil have elevated prices for all manufactured goods as well as across the transportation sector. Also, new or expanding businesses faces more costly startup expenses from elevated fuel costs. These factors dampen economic activity.

It’s not stressed enough that oil prices have lowered the performance of economies importing oil since 1973.


Free Market versus the Status Quo

Economics

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