Topic 5 Oil

Question 1

What approaches did the energy industry use to manage the problems related to indivisibility of capital and excess capacity?

Answer 1

• Oil industry used horizontal integration

- Electricity and network industries used regulation

Question 2

What factors does the stability of a cartel depend upon?

Answer 2

1. Group size
2. Group discipline (compliance)
3. Group characteristics
4. Dispersed, large number of buyers
5. Member gains
6. Policing

Question 3

What models are there to analyse cartel behaviour?

Answer 3

• Cartel model
• Dominant firm model
• Limit pricing model
• Target revenue/social cost of production model

Question 4

Define Peak oil

Answer 4

Peak oil is a hypothetical point where crude oil production hits its maximum rate, after which production declines (Hubbert’s bell). If new reserves are not brought online at a rate greater than current reserves are being used, then peak oil has been reached.It can also be brought about as a result of more oil alternatives becoming cost effective, making E&P unprofitable.

Question 5

When was standard oil founded by John D Rockefeller

Answer 5

1870

Question 6

Define economic rent

Answer 6

The return in excess of those required to sustain production

Question 7

What are the three classifications of reserve?

Answer 7

1. Proven (90%)
2. Probable (>50%)
3. Possible (<50%)

Question 8

Define reserve

Answer 8

The reserves of a given resource is the quantity that is economically recoverable given current prices, costs and technology.

Question 9

What qualities should a cartel leader have?

Answer 9

• Low financing requirement
• A major market share
• High flexibility in capacity utilisation
• Less sensitive to changes in energy markets