Question

There are two kinds of oil wells in most oil-producing parts of California. One kind is located on top of reservoirs of oil that are near the surface. They are owned by large oil companies. There is a second kind of well, called “wildcats.” Wildcat wells are deeper and it costs more per barrel to bring the oil to the surface than from the first kind of well. The wildcat wells are owned by smaller, independent companies. Last year, the world price for oil was $50 a barrel, and 100 million barrels per day were purchased. This year, the world demand for oil has suddenly decreased due to the drop in travel because of fears of coronavirus. Many of the wildcat wells in California go out of business. Show how this happens using supply and demand curves. You do not need to include in your answer what you might have heard about Russia and OPEC (Organization of Petroleum Exporting Countries) regarding the supply of crude oil.

Answer 1

Since the advent of Coronavirus, majority of refineries and upstream companies have shut shop temporarily and thus the aggregate demand for crude oil which was nearly 100 million barrels has come down drastically coupled with recent price wars from other nations dragging down crude oil prices as the supply now exceeds demand exponentially.

Hence such small companies where cost of production is higher than selling price turn to losses and ultimately shut shop as it becomes unviable to do business due to such an event termed as "Negative Demand Shock."

PAGE NO.: DATE: ADO VADI GOT NEGATIVE DEMAND Shock

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