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Petroleum Price Elasticity, Income Effects, and OPEC's Pricing Policy

F. Gerard Adams and Jaime Marquez

Year: 1984
Volume: Volume 5
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No1-7
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Abstract:
A standard result from static economic theory is that a monopolist with zero cost will maximize profits by charging the price at which the demand has unit elasticity. Yet, the demand for petroleum, as seen by consumers, is price inelastic, and empirical estimates of the price elasticity for petroleum are typically less than one. Given the relatively low production cost for Middle East oil and the optimization rule referred to above, a natural question is whether OPEC, acting as a monopoly, has exhausted its potential for forcing price increases or whether it will ultimately be able to charge still higher prices as it tries to optimize its earnings. This possibility of higher oil prices is important for OPEC and for oil-consuming countries-for OPEC because the finite nature of resources implies that excess production today represents an irrecoverable loss; for consuming countries because of the high cost of oil and the adverse consequences of still higher oil prices on inflation and unemployment.



Future World Oil Prices and Production Levels: A Comment

Franz Wirl

Year: 1990
Volume: Volume 11
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol11-No3-7
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Abstract:
In a recent paper published in this journal, Marsballa and Nesbitt (1986) present an economist's point of view of OPEC pricing. In particular, they compute profit maximizing price strategies using a dynamic representation of the world oil market. The purpose of this paper is not to dispute the calculated numbers but to question the qualitative validity of the calculated optimal paths. The claim of this note is that it is very unlikely to generate smooth paths -- e.g. the price strategies shown in their paper -- the presented framework.





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