7 ms·

That depends on what you define as a market that isn't broken. In a perfect free market the oil producers make zero profits and this is a move towards fixing th

That depends on what you define as a market that isn't broken. In a perfect free market the oil producers make zero profits and this is a move towards fixing the market

wernercd 7y ago
"in a perfect market producers make zero profits" In what world would any company make zero profits in a "perfect" sense? Companies exist to make profit...
- vikramkr 7y ago
  Perfect here refers to the mathematical model of a perfect market and perfect competition, not an external normative sense of the word as some societal ideal.
- Klinky 7y ago
  Even in the real world the idea that "companies exist to make profit" sounds wrong. Companies exist to ideally output goods or services, and profit is a tool to ensure they can continue making those goods or services. It can be hard for a company to exist without making a profit, but not the reason they exist.
- savanaly 7y ago
  You're thinking of accounting profit, the person you're replying to was thinking of economic profit. https://www.investopedia.com/ask/answers/033015/what-difference-between-economic-profit-and-accounting-profit.asp https://www.investopedia.com/ask/answers/033015/what-differe...
bryanlarsen 7y ago
In a perfect free market for a commodity price is the marginal cost: in other words if there is demand for N barrels of oil per day at the market price, that market price is the cost of production for the Nth most cheapest production cost. Anybody whose cost of production is cheaper makes money. For a long time that marginal cost was Canadian oil sands oil, which cost about $40 a bbl to extract and $10 to ship. The Saudis who can produce at $10 a bbl were making money hand over fist.
- vikramkr 7y ago
  Most definitions of perfect free markets include some element of perfect competition. The math essentially assumes there are an infinite number of saudis producing at $10 a barrel that compete with eachother down to marginal cost. Obviously these aren't realistic assumptions and pretty much everyone has some form of monopoly power, such as the saudis in your case which have monopoly power coming from lower cost of goods.
  - thaumasiotes 7y ago
    > Obviously these aren't realistic assumptions and pretty much everyone has some form of monopoly power, such as the saudis in your case which have monopoly power coming from lower cost of goods. That's not what "monopoly" means. Monopoly power isn't just a fancier word for market power. Monopoly power is power derived from the fact that nobody else is selling what you're selling. Note that in this example, the Saudis can't raise the price of oil above $50 / barrel. Setting a price of $60 would send their sales to 0 rather than to whatever the level of demand is at $60. They can't do it because they don't have monopoly power. (If you expand the example a little, saying that world oil demand exceeds the amount Canada can produce, then you can claim that Saudi Arabia has monopoly power by virtue of being able to sell oil that Canada can't sell. But in the model where Canada can produce any amount of oil at $50 / barrel and Arabia can produce any amount at $20 / barrel, there is no monopoly power anywhere.)
    - vikramkr 7y ago
      Pricing power is a better word that monopoly power in this case then, should have been more precise in wording. They arent price takers is the point. They have price making power and a downward sloping demand curve until 50 bucks a barrel
      - clairity 7y ago
        no, economists and policymakers agree with your usage of monopoly power. monopolies aren't simply a function of number of market participants. semantic digressions like these are non-sequiturs and should be ignored.
hutzlibu 7y ago
" In a perfect free market the oil producers make zero profits" Where does this conclusion come from?
- eropple 7y ago
  From...economics? Profit is market inefficiency, whether due to missing information or inadequate competition. Perfect efficiency drives prices down to the marginal cost of a good or service. Micro 101 stuff.
  - wcoenen 7y ago
    Wouldn't you expect the rate of return to approach the risk free interest rate, rather than profit being zero?
    - vikramkr 7y ago
      Zero profits in economic models are usually in the context of economic profits, not accounting profits. So yeah, kind of (though there's risk adjustment needed, but when you start bringing in real world stuff like that your econ 101 supply curve/demand curve abstraction really starts breaking down, there are far more sophisticated economic tools for that). Perfect competition doesn't also really exist so we're just being guided by the math.
    - MR4D 7y ago
      The risk free interest rate is zero. Heck, by the time you read this, it could go negative!
      - vikramkr 7y ago
        It already did nominally for a brief moment there
        MR4D 7y ago
        Good point.

That depends on what you define as a market that isn't broken. In a perfect free market the oil producers make zero profits and this is a move towards fixing the market

wernercd 7y ago

"in a perfect market producers make zero profits" In what world would any company make zero profits in a "perfect" sense? Companies exist to make profit...

vikramkr 7y ago
Perfect here refers to the mathematical model of a perfect market and perfect competition, not an external normative sense of the word as some societal ideal.
Klinky 7y ago
Even in the real world the idea that "companies exist to make profit" sounds wrong. Companies exist to ideally output goods or services, and profit is a tool to ensure they can continue making those goods or services. It can be hard for a company to exist without making a profit, but not the reason they exist.
savanaly 7y ago
You're thinking of accounting profit, the person you're replying to was thinking of economic profit. https://www.investopedia.com/ask/answers/033015/what-difference-between-economic-profit-and-accounting-profit.asp https://www.investopedia.com/ask/answers/033015/what-differe...

bryanlarsen 7y ago

In a perfect free market for a commodity price is the marginal cost: in other words if there is demand for N barrels of oil per day at the market price, that market price is the cost of production for the Nth most cheapest production cost. Anybody whose cost of production is cheaper makes money. For a long time that marginal cost was Canadian oil sands oil, which cost about $40 a bbl to extract and $10 to ship. The Saudis who can produce at $10 a bbl were making money hand over fist.

vikramkr 7y ago
Most definitions of perfect free markets include some element of perfect competition. The math essentially assumes there are an infinite number of saudis producing at $10 a barrel that compete with eachother down to marginal cost. Obviously these aren't realistic assumptions and pretty much everyone has some form of monopoly power, such as the saudis in your case which have monopoly power coming from lower cost of goods.
- thaumasiotes 7y ago
  > Obviously these aren't realistic assumptions and pretty much everyone has some form of monopoly power, such as the saudis in your case which have monopoly power coming from lower cost of goods. That's not what "monopoly" means. Monopoly power isn't just a fancier word for market power. Monopoly power is power derived from the fact that nobody else is selling what you're selling. Note that in this example, the Saudis can't raise the price of oil above $50 / barrel. Setting a price of $60 would send their sales to 0 rather than to whatever the level of demand is at $60. They can't do it because they don't have monopoly power. (If you expand the example a little, saying that world oil demand exceeds the amount Canada can produce, then you can claim that Saudi Arabia has monopoly power by virtue of being able to sell oil that Canada can't sell. But in the model where Canada can produce any amount of oil at $50 / barrel and Arabia can produce any amount at $20 / barrel, there is no monopoly power anywhere.)
  - vikramkr 7y ago
    Pricing power is a better word that monopoly power in this case then, should have been more precise in wording. They arent price takers is the point. They have price making power and a downward sloping demand curve until 50 bucks a barrel
    - clairity 7y ago
      no, economists and policymakers agree with your usage of monopoly power. monopolies aren't simply a function of number of market participants. semantic digressions like these are non-sequiturs and should be ignored.

hutzlibu 7y ago

" In a perfect free market the oil producers make zero profits" Where does this conclusion come from?

eropple 7y ago
From...economics? Profit is market inefficiency, whether due to missing information or inadequate competition. Perfect efficiency drives prices down to the marginal cost of a good or service. Micro 101 stuff.
- wcoenen 7y ago
  Wouldn't you expect the rate of return to approach the risk free interest rate, rather than profit being zero?
  - vikramkr 7y ago
    Zero profits in economic models are usually in the context of economic profits, not accounting profits. So yeah, kind of (though there's risk adjustment needed, but when you start bringing in real world stuff like that your econ 101 supply curve/demand curve abstraction really starts breaking down, there are far more sophisticated economic tools for that). Perfect competition doesn't also really exist so we're just being guided by the math.
  - MR4D 7y ago
    The risk free interest rate is zero. Heck, by the time you read this, it could go negative!
    - vikramkr 7y ago
      It already did nominally for a brief moment there
      - MR4D 7y ago
        Good point.