Of Games and Theories…

have you ever wondered about the fuel prices

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You have no idea how much my pocket danced at the news of a drop in fuel prices. I smiled as I imagined myself queuing at the gas station to fill the rumbling belly of my petite. Eudaimonia! “Tomorrow” is the day I promised self to check the price boards and confirm they reflected the almost $0.10 per litre fall. Doesn’t sound like much for low consumption vehicles (read small engines) but whichever the case a penny saved is always a penny earned.

But have you ever wondered about the fuel prices. Why they keep going up and in the same rhythm come tumbling down? Why is it that sometimes everyone seems to be hurriedly dashing to fuel station and in other times station owners are desperately investing in ‘happy’ franchises to attract more customers? Even the non-car owner, the one who uses public transport is directly affected through fluctuating fares that usually don’t come down after significant upsurges. What exactly is the game? Or is there a plausible theory?

So I brushed through a couple of articles on the volatility of oil prices and whoa! it took me back to the fourth of nine rows of our 20XX macroeconomics class. The demand, supply, price elasticity curves, which really gave me a hard time in that 1st year of campus, suddenly made sense. (looking forward to the day I will say the same for parallelograms!)

The theory. Positive shocks would be as a result of increased production from OPEC (Organization of the Petroleum Exporting Countries) as well as non-export oil producing countries consequently lowering oil prices. However, if any of the quotas of these 13 countries (Nigeria, Algeria, Libya, Angola – just to proudly mention the African member states) are curtailed in the sense of production or political issues, then prices automatically go up. Negative shocks would result from significant decline in demand. Case in point – China. When such a large economy experiences downturn, the world cries. In fact, the current oil pricing is reported as the ‘worst‘ in the past decade.

The games. In a monopoly (one seller/producer for a product), no competition exists and so the company’s wish is the customers command. For duopolies, the two companies have to work in a way that they balance their margins and market share else they can easily find themselves at the mercy of the consumer. The real games lie with oligopolies such as the OPEC cartel because power (pun intended) is at their feet.

In my readings, I came across an interesting view that cartels help regulate the volatility present in every commodity market. Well I don’t know about that, all I remember is that some of us really suffered (and sometimes benefited) from the cartels that happened at the University library. Hoarding of knowledge 🙂 Celebrate, it’s Friday!

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