Running head: ECONOMIC THEORIES ANALYSIS 1

Economic Theories Analysis

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Economic Theories Analysis

An article titled “Is the U.S. Oil Industry Dominant? On the Verge of Oblivion? Neither"

by Robert L. Kleinberg and published on October 7, 2019, on The New York Times is discussed

in this paper. It focuses on the oil market in the U.S., the Middle East, and Europe. In the U.S.,

for instance, changes in the oil market are in substantial control as prices of the important

product rise and fall in effect to commercial pressures and investor performance. Moreover, the

article reflects that a recent Britain attack on an Iranian oil tanker did not considerably affect oil

prices. Similarly, Iran retaliated by seizing a British oil tanker, and still, the oil market was not

affected in the involved countries. According to the secretary of the State of Condoleezza Rice,

the cases by Iran and Britain would have turned out differently a decade ago. That is, prices

would have hiked over and above the minimum expected ratio. Moreover, it’s an interesting

phenomenon that observers and investors study; that an attack threatening such a wide

population globally had no substantial effect on oil markets and prices in general. The author

also notes that the U.S. demonstrates a considerable amount of strength in the oil market

industry, even without overseeing from an authoritative body, and it's not a low-cost supplier.

The reason behind this empowerment could be drawn by the fact that it holds an advantage over

other swing producers such and Saudi Arabia. The U.S. produces tight oil, which has not been

significantly exploited in other countries. The American oil market operates in the absence of

spare capacity, whereby oil is held in large amounts as a reserve that can later be pushed into the

industry for a relevant period. As a whole, this paper employs the Keynesian economic theory to

explain the concepts of aggregate demand and aggregate supply around the monetary and fiscal

policy.
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The economic theory demonstrates that optimal industrial performance in economics can

be reached, and economic shortfalls avoided. However, this only applies when the aggregate

demand via activist stabilization and intervention in government policies is influenced.

Nevertheless, the theory exclusively focuses on economic changes in the short run. From the

article, this is evident in that the Middle East and North Africa draw income mostly from

domestic oil companies and, in turn, the returns cover the cost of public services (Kleinberg,

2019). On the other hand, income depends on oil prices for these countries. To achieve the

national budget, they have arrived at a fiscal break-even. Fiscal reforms are, therefore, necessary

to achieve this break-even. The stability of the State, as shown in the article, is, hence, at risk,

especially if the oil prices stagnate below the fiscal balance longer than necessary. The case for

American oil suppliers shows an entirely different scenario since even when profit margins

appear modest, production still increases by the day. For instance, a chain of economic

performance shows that as the price of oil goes down, drilling fluctuates, but production still

increases. The Organization of the Petroleum Exporting Countries (OPEC) tried to wave

industrial oil performance by using price caps but failed in the attempt to drive out tight oil in the

market a decade ago. As described in the article, tight oil acts as an efficient boundary for other

products that could exercise dominance in the U.S.

Saudi Arabia exercises a central control of oil supply, although it has recently shifted to

the production of crude oil in an attempt to stabilize oil prices. Image 1 demonstrates a long-term

equilibrium (eq) between prices and real gross domestic products. Being a swing producer, Saudi

Arabia does not perform on the same market level as a dominant producer as the latter has power

through medium and long-run market performance. OPEC acted as a dominant producer in the

1980s, but there are no longer dominant producers today. This is because no nation or group
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thereof has existing control over oil markets (Kleinberg, 2019). Dominant producers have the

power to increase prices by reserving supplies and after that, take market share by increasing

supply. Demand for a product such as oil is regularly on a high, but more supply of oil in a

nation such as Saudi Arabia attracts stable prices, which influence a long-run equilibrium as in

image 1.

Image 1: Representation of aggregate demand (AD) and aggregate supply (AS)

Market attempts by oil suppliers supporting an increase in price while reducing

production could be met by an overflow of American oil. The U.S. oil market can raise its

production rate by a wide margin annually, as is the case since 2011 (Kleinberg, 2019). On the

other hand, Middle Eastern countries such as Saudi Arabia are unable to meet an increase in

market share by raising the production of cheap oil. However, the expected profit margins for the

two nations is significantly different. In the case of the Middle East and North Africa, the higher

the price, the more the income created for national oil companies leading to the effective
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payment of public services. Image 1 shows that an increase in price draws a higher demand for a

necessity such as oil, which requires higher production.

I agree with majority of ideas presented in the discussed article. For instance, I agree that

its likely that the oil market will take a turn in the future and particularly in terms of oil

production. That is to mean that investors have reasons to worry as daily demand for oil

increases since a higher level of production would be necessary to meet optimum demand.

Resources required for the production of oil are depleting by a fast rate hence it will be necessary

to find other production means that profit margins. In the same manner, the oil levels continue to

deplet across the globe. This can be mitigated by implemeting laws that regulate the amount and

methods of oil production.

On the othe hand, although the policy on aggressive decabonization is necessary in

achieving an environmentally friendly production line, it will require suppliers to use complex,

high-cost, and riskier prospects which may in trun affect price levels. For this reason, I

recommend adequate investment strategies that can meet future changes without affecting the

local consumers significantly. Fiscal reforms are also necessary in States such as in the Middle

East to control break-even points in terms of oil production.

In conclusion, the Keynisian economic theory addresses aggregates demand and supply

of a product such as oil. However, the U.S. oil industry may remain at a float given their

complacensy in market control while others are likely to require fiscal reforms to achieve break-

even points.
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Reference

Kleinberg, R. L. (2019, 10 7). Is the U.S. Oil Industry Dominant? On the Verge of Oblivion?

Neither. Retrieved from The New York Times:

https://www.nytimes.com/2019/10/07/business/United-States-tight-oil-market.html