A major problem firms are facing is the cost
of shutting down and then restarting production once the price of oil rises.
However, this is too costly for firms to do, so they have continued to produce
despite the low prices.
In addition, Canadian
firms and US firms have been expanding their production leading to more output.
Firms in the Middle East have also continued to produce contributing to the low
oil prices. There have been some predictions that the price of oil could fall
to almost 10$ a barrel.
It will be
very interesting to see what happens in the market for oil in the up coming
months. I believe as long as firms wait around and refuse to cut production the
price of oil will continue to fall. Some firms will be able to maintain this
loss of selling barrels at a lower price than the cost of production, but
after time I believe that many firms will eventually leave the industry. While
some people believe that the demand for oil will pick up, I do not believe that
it will be enough to raise the price of a barrel above the cost of production.
Eventually firms will leave the industry because they will not be able to
sustain such losses.
This could be a huge
hit on countries such as Kuwait, Libya, Saudi Arabia, Iraq and
other countries who have a large amount of there GDP dependent on oil
production. Especially when the two countries with the most amount of oil in
the world are not on that list.
I thought this article was interesting to read because I have worked for an oil company. the business was a small one and there is no way that they would be able to handle prices as low as $10 a barrel. The big companies that can handle the low costs will be glad when the prices go up because they will be making more money and have less companies to compete with. I feel that the government would step in before the prices got to $10 a barrel.
ReplyDeleteI like the perspective this article takes. We are always discussing falling oil prices, never really realizing the reasons behind the same. It makes sense though that with improved technology production is easier and thus increased supply, while demand has remained rather constant.
ReplyDeleteHowever I am curious to know why companies are not taking advantage of this surplus to use for alternative uses and/or for other industries.
This is an interesting article because I almost never hear about big firms producing on a loss. I agree with Zach that over an extended amount of time, small firms will certainly drop out of the market but hopefully the market for crude oil begins to rise again to dissuade this from happening. As of Sunday, crude oil prices have slightly increased to $32.80. Hopefully this price is large enough to allow smaller firms to stay in the market.
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