The Direction of Crude Oil Prices: The Role of Market Structure

Abstract

This article focuses on the price inelasticity of demand for crude oil in the short run and its implications. We show that any producer with a share greater than the elasticity of demand, weighted by its profit margin, could benefit by curbing supply to increase profits. This means high cost producers have a lower threshold to meet before they can profit from a reduction in output. It also implies that high cost producers without major shares may benefit, albeit not as much as those who free ride on cuts by others. We note that the increased competitiveness of the global oil market and differing national preferences may be preventing cooperation that would benefit many producers.