Key objective: exemplifying the limitations ofthe power of oligopoly due to short-term and long-termelasticities.

Setting: Imagine you are representing one ofthe members of the OPEC, and you are motivated by an increase ofyour revenue from the sale of crude oil. You have to compromise oncurrent decision on possible output decrease as to stimulate theworld price of gas. Please consider the historical relation of thereaction of the gas price at the pump to the world price of thecrude oil per barrel. Please resort to the NYU STERN case on ThePetroleum Market: 1970 – 2000 (via link provided below theassignment), but most of all to the research on the followingissues in the summer of 2008 in the US and now, and the politicaldebate on the energy crisis, environmental protection and renewablesources of energy.  

Instruction: As usually, please complete theassignment discussing the relevant economics concepts and applyingeconomic tools with supporting data for problem solving in thisreal-life imitating simulation, and include also a memo summarizingthe points of agreement to be reached and followed by OPECunanimously, and with the compliance in the forthcoming months.

Outline: Include in the discussion thefollowing issues with data, as the basis for your common decisionto be made:

•      demand patterns for crude oil inthe World

•      the price elasticity of demandfor gas in the US

•      the factors influencing theprice elasticity of demand for gas in the US, and possible changesin this respect (behavioral patterns)

•      the impact of price changes (ondifferent price levels) on the revenue of crude oil exporters

•      the income elasticity of demandfor gas

•      the price elasticity of supplyof gas

•      the effect on the marketoutcome, on the market equilibrium, and on the efficiency of themarket

•      the effect on the internationaltrade, state policies, and on the economy.