More on Gas

This article gives an interesting argument and technique for determining the future price of oil. The author implies that, “in theory, there is no upward limit on the price of oil.” Now, we might argue that this is simply not case. Regardless of what happens to the demand, even though the short-run price will fluctuate, in the long run, the price of oil should always remain constant. Firms should enter and exit the industry accordingly so that ultimately each oil producers’ marginal profit is equal to his marginal cost. So where does the problem come into play? Producers of oil are using an input of limited supply. According to our text, for these items, even the long-run industry supply curve will be upward sloping.
Another area in which oil sales go against the model is in the assumption of perfect competition. Although there are a large number of small buyers and the product is basically homogeneous, the shared information is far from perfect. Oil is traded globally; information is always changing and kept secret as much as possible. Additionally, as the article goes on to describe, there are several other factors affecting the supply and demand of oil. The circumstances go well beyond our simple model.