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Commentary 1: The article deals with the OPECs decision to keep production quotas unchanged as the market is oversupplied with crude oil. Abiding by the fundamentals of supply[1] and demand[2], the worry of the OPEC member states involves

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Introduction

IB Economics SL Internal Assessment Student's Name: --- Commentary Number: 1 Today's Date: Thursday, October 8, 2009 Extract Title: OPEC leaves output targets unchanged, citing oversupply and slow recovery Extract Source: http://ca.news.finance.yahoo.com/s/09092009/2/biz-finance-opec-leaves-output-targets-unchanged-citing-oversupply-slow.html Extract Date: Wednesday, September 9, 2009 Commentary Relates to Syllabus Sections: 1, 2 Commentary Word Count: 745 words OPEC leaves output targets unchanged, citing oversupply and slow recovery Wed Sep 9, 10:52 PM Tarek El-Tablawy, The Associated Press VIENNA - OPEC on Thursday decided to leave its production quotas unchanged, opting to take a cautious approach in a market awash in crude and a global economy still in the nascent stages of recovery. The 12-country Organization of Petroleum Exporting Countries said "market fundamentals have remained weak," even though current oil prices at about US$71 are roughly double their level since December, when the group announced a record 4.2 million barrel per day cut from September 2008 levels. The upswing in prices was a blessing for the bloc - supplier of roughly 35 per cent of the world's crude - but OPEC ministers noted volatility remained in the market and a delicate touch was needed to ensure that the uptick does not derail global economic recovery efforts. ...read more.

Middle

But el-Badri also stressed that the group was not ready to jeopardize the economic recovery efforts by pushing for steep cuts. "We are working on a very thin line," he said. "We have to be very careful. We don't want to take action that will jeopardize the recovery." Commentary 1: The article deals with the OPEC's decision to keep production quotas unchanged as the market is oversupplied with crude oil. Abiding by the fundamentals of supply1 and demand2, the worry of the OPEC member states involves the volatility of crude oil prices as the market is swarmed with a surplus3 of oil. Due to the dependence of the OPEC member states on the prices of crude and its derivatives, the organization has pledged to maintain the status quo of production quotas around the current price of $71. Essentially, as crude is the core ingredient for gasoline, its price will present numerous implications upon the market for various products. Below is the diagram indicating the market for crude in its current state with a surplus as a result of overproduction. As seen in Figure 1, A1 indicates the current state of OPEC oil production, which is much higher than the equilibrium4 point A0 indicated by Saudi representatives as around $75 per barrel, which is a "fair price for both producers and consumers". ...read more.

Conclusion

Figure 3 highlights such a situation, where the elasticity of oil production has turned elastic over time, and there is only a small increase in price whereas demand has also largely turned elastic. In essence the total revenue8 of the market in the long run as opposed to the short run would decrease significantly. Such implications prevent the OPEC states from both decreasing the production and causing the above responses, or likewise overproducing like the current situation and saturating the market with more oil than necessary. Note: Figure 2 and 3 are derived from: Mankiw, N. Gregory. Principles of Economics. Fifth Edition. South-Western College Pub, 2008. Print. 1 Amount of a good or service that sellers are willing and able to sell 2 Amount of a good or service that consumers are willing and able to buy 3 Situation in which quantity supplied is greater than quantity demanded 4 Situation in which market price meets the point where quantity supplied equals quantity demanded 5 Measure of the responsiveness of the quantity supplied of a good to a change in price of that good 6 Percentage change in quantity supplied Percentage change in price 7 Percentage change in quantity supplied Percentage change in price 8 Price of a good multiplied by the quantity sold. ?? ?? ?? ?? ...read more.

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