ECO100 Principles of Economics
Develop an economic brief that is two to three (2-3) pages long in which you:
- Select an industry and describe the goods and/or services this industry produces. Pick an industry from the NAICS list.
- Identify this industry’s market structure and at least two or more market characteristics that support this market structure.
- Describe any notable microeconomic relationships, market outcomes, and/or trends in this industry. Include a graph, chart, or table containing related data.
4.How might government impact this industry’s market prices, output, and/or market structure? (Government intervention through price controls, industry regulations, and antitrust enforcement is covered in Weeks 2 and 4.)
- This course requires use of Strayer Writing Standards (SWS). The format is different compared to other Strayer University courses. Please take a moment to review the SWS documentation for details. (Note: You’ll be prompted to enter your Blackboard login credentials to view these standards.)
o Your brief should include a cover page.
o Your brief should be two to three (2-3) pages in length (not including the cover page), double-spaced, 12-point font.
o Your brief should include a minimum of one (1) reference/citation in the text.
Answer:
Introduction
Operation of an industry is largely attributed to specific characteristics of the industry. Market structure of an industry is determined by concentration of firms in the industry. The oil and gas subsector of United State operate under oil and gas field properties. The major activities of the industry include extraction of oil and natural gas, equipping wells, emulsion breaker, operating separators and others (census.gov, 2018). The concerned industry is largely characterized as an oligopoly market. The concerned industry has characteristics similar to that of an oligopoly market.
Market structure of Oil and Gas extraction industry
An oligopoly market is identified as being dominated by few large players. The major players in the industry captures a significant portion of market share. As oil and gas industry in United State is dominated by few large player, it is identified as an operating oligopoly (Baumol & Blinder, 2015). Following merger and acquisition in the concerned industry there are four large oil companies in United State enjoying a significant market power.
ExxonMobil, ConocoPhillips, Chevron and Marathon Oil are the four largest oil companies that dominate US oil industry. The four big companies represent nearly 80 percent of all Oil and Gas companies in United State. Among the four firms Exxon Mobil has a market share of 41 percent which is followed by 25 share of Chevron (Shaffer, 2016). The market share of ConocoPhillips and Marathon are 12 percent and 21 percent respectively.
An important feature of oligopoly market is the presence of high entry barriers. The large firm heavily invest in research and technology development to reduce cost and increase reserves. For example, with the objective of maintaining dominant position in the industry Exxon Mobil invest approximately $600 million annually (Joskow, 2013). New firms find it difficult to enter the industry because of huge sunk cost.
Microeconomic trends in the industry
There are limited alternative to oil and gas consumption in the short term. As a result, price is extremely sensitive to a change in supply and demand. Change in demand and supply condition results in large change in prices which bring the supply and demand in balance as explained by standard microeconomic theory (Mankiw, 2017).
In for some reason supply increases, then given demand there exists an excess supply in the market. The excess supply over its demand reduces price in the market. The lower price then encourages people to increase demand following the law of demand. This in turn leads to a balance between market supply and market demand. Conversely, if there is an increase in demand then given constant supply price increases. Higher price encourages producers to supply more because of higher profitability (Baumol & Blinder, 2015). The increased supply then matches with demand to restore equilibrium in the market.
Figure 1: Price and output trend in the gas industry
(Source: eia.gov, 2018)
The figure above shows movement of spot price and dry gas production in the market. As show in the figure an increase production is associated a decline in spot prices. The consumption of natural gas in United State is mostly satisfied with domestic production. The dry natural gas production increased continuously from 2006 to 2015 (Shaffer, 2016). As a result of increased production of natural gas there is a decline in corresponding spot and consumption prices.
Scope of government intervention in the market
Excessive concentration of the market might harm social interest. In the concentrated Oil and Gas industry in United State, the four big companies are able to manipulate price and output in the industry. The companies can also involve in merger to influence output and price in the industry. To prevent excessively high price in the market government might set an upper limit of price by the policy of price limit. Price ceiling is defined as a set maximum limit beyond which firms cannot increase price in the market (Baumol & Blinder, 2015). The policy aims to offer commodity at an affordable price.
Government might implement anti-trust law to protect consumers from self-satisfying motive of business. The law works against any form of cartel in the industry. By preventing behavior of cartel government might increase social welfare (Mankiw, 2017). The encouragement of a competitive environment might change the market structure from an oligopolistic market to a competitive one.
Conclusion
The gas and oil extraction industry in United State possess the characteristics of an oligopoly market. Like an oligopoly market the industry is dominate by few large seller, maintain a high barrier to entry and other features of the specific market. Supply and demand plays a vital role in determining price in the industry. Followed by the increasing production of natural gas from 2006 to 2015 prices constituted a declining trend. Because of huge market concentration, there is room for government intervention to protect social interest.
References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson Education.
Factors Affecting Natural Gas Prices - Energy Explained, Your Guide To Understanding Energy - Energy Information Administration. (2018). Retrieved from https://www.eia.gov/energyexplained/index.php?page=natural_gas_factors_affecting_prices
Joskow, P. L. (2013). Natural gas: from shortages to abundance in the United States. American Economic Review, 103(3), 338-43.
Mankiw, N. G. (2017). On welfare economics in the principles course. The Journal of Economic Education, 48(1), 27-28.
NAICS Search. (2018). Retrieved from https://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=211&search=2017%20NAICS%20Search
Shaffer, E. H. (2016). The United States and the control of world oil. Routledge.
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