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Crude oil is one of the most important commodities in the world. It is a source of input for the production of petroleum products such as gasoline, diesel fuel and kerosene which generally end up in petrol stations and factories across the world. As a result, the overwhelming majority of oil is used in transportation and industry. According to a recent research publication carried out by British Petroleum, in 2015, oil made up 33% of the world’s total primary energy consumption which was the largest source of fuel closely backed by coal at 30%. This shows the dependency of world economies on crude oil as well as the importance it plays in meeting our energy needs. Crude oil is generally traded on double auction markets including stock exchanges such as the New York Mercantile Exchange (NYMEX) which means that it is traded frequently at high volumes. The existence of a double auction in this market also means that knowledge about the prices of crude oil is widely available as virtually anyone is able to view the selling price of the product.There are many different grades of crude oil that are exchanged on different or sometimes the same markets depending on the levels of demand. The most commonly used crude oil in the United States is the West Texas Intermediate (WTI) which is a type of Light Sweet grade crude oil that is used as a benchmark in oil pricing. In contrast, the most commonly traded crude oil in the United Kingdom is Brent Crude which is extracted from the North Sea and is used as a benchmark to price two thirds of internationally traded crude oil. The existence of multiple benchmarks in the market for crude oil is due to the differentiability of the product as different grades of crude oil are used for different purposes, thus they are priced differently. This product differentiation ensures market power for suppliers of crude oil as demand cannot entirely be competed away.The market for crude oil is very oligopolistic in nature because of the lack of competition and high levels of interdependence between firms. Due to very high entrance and exit costs, it is difficult for firms to be able to invest enough money to turn a profit or even to be able to cover their variable costs in the short run. The fact that oil is a non-renewable resource that is found sporadically across the world also makes it very difficult for firms or countries to become a participant in the market. This is also why some of the biggest oil producing firms in the world are state-owned, for example, Saudi Aramco (Saudi Arabia) and Sinopec (China). Saudi Aramco is currently the world’s largest exporter of oil and it was producing an average of 10.5 million barrels a day in 2016 (according to Bloomberg) which effectively provides Saudi Arabia with a robust stake in the global market for crude oil. The Organisation of the Petroleum Exporting Countries (OPEC) was founded in 1960 and is an organisation that coordinates the petroleum policies of its twelve members states. OPEC is often described as a cartel due to the fact that its member states collude on production output and prices in order to be able to maximise their profits in the crude oil market. The leading member in OPEC is Saudi Arabia as it is the largest producer of oil within the organisation and thus dictates most of its policies. OPEC manages to increase its profits and market share by fixing prices and controlling production output which reduces the supply of crude oil leading in higher prices. Since Saudi Arabia is a dominant participant in OPEC, the production of all members also tends to be influenced by tacit collusion whereby followers in the cartel alter their outputs and prices in accordance to the dominant firm (in this case it is a country). This is why for non-OPEC oil producing countries, such as Russia and the US, one of the major drivers of price for crude oil is OPEC’s production target, for which Saudi Arabia has a lead role in determining.(Source: Page 200, Economics 9th Edition, John Sloman)One unusual strategy that has been utilised by Saudi Aramco in the past was attempting to sabotage foreign energy markets by producing crude oil outside of their profit-maximising outputs. In 2014, Saudi Aramco increased their oil outputs despite the fact that oil prices were falling, which in turn led to the exacerbation of the fall in prices that ultimately harmed (mainly) US oil production. This meant that Saudi Aramco was harming itself by producing over their price-maximising output, however, the justification for this loss was to undermine the US shale industry. By reducing the prices of oil, Saudi Aramco managed to reduce the average revenues of firms operating in the US shale industry through limit pricing, thereby reducing the amount of competition as well crippling new entrants. Although the effectiveness of this strategy is debatable, the US shale industry has mostly managed to overcome these barriers and as a result, the US is currently the largest producer of shale oil (which is a substitute for crude oil).According to the Oil Market Review published by the International Energy Agency (IEA), the global oil markets are currently still in the process of balancing between supply and demand. The United Arab Emirates’ energy minister has also recently stated that balanced oil markets should be expected in January 2018. The main reasons for the markets beginning to strive for an equilibrium is due to the production cuts made by major producers of oil. The IEA stated in their 2016 report on oil markets that “world output grew by just 50,000 barrels a day in April versus gains of more than 3.5 million barrels a day a year ago”. This reduction in the supply of oil is propagated in order to be able to more adequately accommodate the levels of demand that are forecast to occur in the markets. Due to the fact that the oil markets are not in equilibrium, we also know that the markets are not pareto efficient since all transactions are not made at the equilibrium price. This means that producer and consumer surpluses are imbalanced and there is also most likely a deadweight loss in the market, which is a loss of economic efficiency. Since crude oil markets tend to adopt models with few producers that may also form cartels such as OPEC, we can also assume that there is excess capacity present in the market – where actual production is less than what is achievable, which is intrinsically inefficient for the economy.In conclusion, the market for crude oil is a major, globally spanning market that is very important in order for countries to upkeep their transportation and industry sectors. The products that are offered in crude oil markets tend to be fairly homogeneous, although there is limited differentiation due to varying grades of crude oil. As a result of this, producers of crude oil tend to resort to non-price competition, for example by controlling output through stockpiling barrels of oil. The most prominent bloc of producers in the crude oil market is OPEC which is led by Saudi Arabia and is highly influential to the point where OPEC’s production target impacts the price of oil. Finally, oil markets are currently nearing an equilibrium as supply and demand reaches a common point. This is potentially a sign that the crude oil markets will achieve pareto efficiency in the near future.

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