Impact of Monopoly in the U.S. Oil Industry

In the United States monopoly was introduced by the colonial administration. Public works companies obtained contracts exclusively from the colonial administration. This had an impact on the economy since the firms did not have competitors. This meant that companies that were given the contract had the freedom to operate freely and set the prices for the goods and services they provided, so there was no economic freedom. Economic freedom is one of the aspects of modern economics as it helps a company to carry on its activities without interference (Arnold, 2011). The freedom arises from the lack of existing obstacles in the market allows companies to enter and stay in the market where without competition.

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Competition is good for the economy as the entities can engage in contracts and both suppliers and consumers can enter and exit the market at any moment without any barriers (Arnold, 2011). When the government imposes laws and regulations discouraging firms from venturing in a particular sector, the monopolistic firm sets the prices. Oil and gas are one of the industries where OPEC fixes the prices of the products for all the countries which makes the products expensive since the alternatives do not exist or are limited.

Measures such as reduction and elimination of tariffs are used to foster competition in the market (Gur, & Bjornskov, 2017). International trade is also facilitated by the creation of zones that encourage free trade. However, international practices are challenging to implement without the support of the respective governments. In the 19th Century, the US government established laws that were aimed at discouraging corporate trusts which were mushrooming (Isser, 2016).

In a monopolistic economy, lack of competition translates to high prices of goods and services and inferior quality products (Arnold, 2011). Monopoly was under threat when competition policy was introduced in the United States. The monopolistic companies were exploiting consumers who made them appeal to the government to check the price fixing of the companies. The government responded by introducing the Sherman Antitrust Act in 1890 to ban trusts and combinations wanted to control the market. If a particular company has a monopoly, it will set the prices, and the consumers will be forced to purchase it because they are short of alternatives.

Despite the introduction of Anti-Trust Laws the oil and gas sector continued enjoying monopoly because the products produced by one company named Standard oil were not common (Gur, & Bjornskov, 2017). John D. Rockefeller and his partners took advantage of the products' uniqueness and the enormous profits earned to ensure that they remained the giant of the sector even without the help of the banks. Monopoly, however, is not a completely bad thing as it is associated with some positive consequences.

When numerous companies are producing similar products, there is an advantage of price flexibility and increased chances of improved quality (Stigler, 1956). However, when the market had numerous companies, they pumped the waste into the rivers instead of investing in research to find the proper means of waste disposal. Additionally, the pipelines did not meet the standards that is why leakages could occur often. When Standard Oil attained 90% of production and distribution, they had known how to dispose of their waste effectively. The company used the waste to manufacture Vaseline which is a product that is used globally. This shows that monopoly helps in environmental conservation especially when the firm invests in research and innovation.

The monopoly of Standard Oil was achieved after the company established adequate infrastructures to the degree that they did not depend on trains (Stigler, 1956). Although the company broke up in 1911, its achievements made the government realize that there is a positive side of monopoly. Unlike several small companies, a monopolistic firm can establish excellent infrastructure and provide goods and services to a large group of consumers. The monopolistic company is also beneficial as it can manage the waste as compared to small companies which may not be able to effectively manage waste due to lack of adequate resources and innovation.

Data Analysis and Discussion

Monopoly is the market structure characterized by a single seller or a few groups of concentrated sellers. Monopolists do not have adequate competitive as such have the bargaining power as well as the power to set prices. Currently, the Organization of Petroleum Exporting Countries (OPEC) dominates and controls the world oil market in many ways. The monopolists are price setters because there are no viable substitutions or suppliers. As such, they can maximize their profiles to enjoy high monopoly prices above the marginal costs which translate to higher monopoly profit. In the oil and gas industry, the concentration of producers in the energy industry creates a picture of monopoly in the energy industry because there are very few players worldwide (Yan and Pu, 2014). There are 25 big oil companies all of which are in the natural gas. However, of the 25 companies, 18 of the companies are in the oil shale and uranium market. Eleven of the 25 companies are actively participating in the coals market while seven are actively involved in the tar sands while ten largest companies in the energy industry are in the main domestic fuels market including oil, gas, coals as well as uranium (Onour, 2017).

The Impact of Monopoly on the Industry

Monopoly leads to high prices of crude oil and refined oil per barrel. The goals of the monopolists are to control the market and control the price of the products in the market to maximize their profit. With a monopoly, there is less inter-fuel competition which gives the player an opportunity to set the oil prices higher and benefit at the expenses of the public. The monopolists aim at protecting their inflated prices of the crude oil which mean that they will strive to ensure that the synthetic oil from coal industry into the market is delayed. Even if the synthetic coal oil is introduced in the market, the quantity produced will be so little to sustain the market and warrant investment into the market. The synthetic oil would, therefore, be produced at a higher price than the oil prices to make it less attractive to buyer and investors. Even though non-fossil sources of energy will be pursued vigorously, the outcome will be negligible going by the total demand for oil energy worldwide (Onour, 2017). Restricted supply would help the oil industry monopolists maintain their profits by contriving oil prices.

While the high oil prices have been attributed to a shortage of electric cars and rail cars as well as higher wages demanded by the workers in the oil commons, the high oil prices are driven by profit motives (Bouthinon-Dumas and Marty, 2012). Therefore, the increase in oil prices has been caused by the concerted collusion by the oil, gas and coal companies. Other companies that could have competed with the oil industry monopolists argue that the current prices of alternate energy are not high enough to offer an incentive for investment in exploration. However, with OPEC enjoying low production cost and high oil prices, they can limit the supplied volume of oil to increase demand for their oil and increase prices with the increase in demand. OPEC is a monopolist that poses oil which has large economic rent and has used the oil rent to enhances its power (Fowowe, 2014). As long as the demand for oil exists, OPEC's monopoly will remain, and the higher oil prices will continue to increase to cover their production costs and remain with supernormal profit.

Conclusion

If there were many players in the oil industry, the prices of oil would decrease by a large percentage as each company will have to set a lower price to expand their market base., grow and make a profit. The oil industry contracts are usually exclusive which mean that the process changed cannot vary with the prices of other products include prices of fossil fuels and nuclear fuels. Alternative energy producers would not compete in term of prices with the oil companies.

Proposed Solution

To break the monopoly, there should be changes in the intergovernmental policies. The government can develop antitrust laws. The oil industry is one of the leading recipients of welfare and the tax windfalls only make oil companies richer allowing them to afford the means of production and monopolize the industry. The government should include the low-cost oil import to increase competition on the market because the exclusion of the low costs imports is known to add over five cents per gallon to the oil prices. Competition should be restricted to the oil industry and the most effective way is to modify the state pro-rationing in relations to the market demand. This way, the federal import quotas can be broken. The tax subsidies should also be discontinued or any competitive acquisitions by the monopoly oil companies.

References

Arnold, R. A. (2011). Principles of economics. South-Western, Cengage Learning.

Bouthinon-Dumas, H., & Marty, F. (2012). Cartel and Monopoly Policy. SSRN Electronic Journal, 11(12). doi: 10.2139/ssrn.2151719

Fowowe, B. (2014). Paper oil and physical oil: has speculative pressure in oil futures increased volatility in spot oil prices?. OPEC Energy Review, 38(3), 356-372. doi: 10.1111/opec.12036

Gur, N., & Bjornskov, C. (2017). Trust and delegation: Theory and evidence. Journal of Comparative Economics, 45(3), 644-657.

Isser, S. (2016). The Economics and Politics of the United States Oil Industry, 1920-1990: Profits, Populism and Petroleum. Routledge. Kenton, W. (2019). Monopoly. Retrieved from https://www.investopedia.com/terms/m/monopoly.aspOn our, I. (2017). Can OPEC Cartel Reverse Crude Oil Price Downfall?. SSRN Electronic Journal, 21(11). doi: 10.2139/ssrn.3049040

Stigler, G. J. (1956). The statistics of monopoly and merger. Journal of Political Economy, 64(1), 33-40.

Yan, G., & Pu, Q. (2014). Evaluation and Analysis of Administrative Monopoly in China's Oil Industry. The Copenhagen Journal Of Asian Studies, 32(1), 49. doi: 10.22439/cjas.v32i1.4596