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This article discusses the drop in the price of oil. It talks about the causes and effects of this decline. The major cause that it discusses is an increase in supply. It says that supply is up because of fracking in the US and because there is relative stability in the oil-producing countries of the Middle East. The decline has different effects on different people. The article says that consumers in the West (and in the world in general) will benefit from this. They will essentially have more money to spend because they do not have to spend as much on fuel. The losers in this scenario are countries that need oil revenue and that have currencies tied to the price of oil. These countries are getting poorer as oil becomes less expensive.
I will now list nine characteristics of the market system and discuss whether/how each of them is related to the article.
- Private individuals and companies own most of the land and capital. This is not really related to the article because no companies are mentioned and many of the countries discussed have state-run oil companies.
- There is freedom of enterprise and choice. We can see this a little bit in the article because it implies that people/companies will change their actions in response to the decline in the price of oil. They mention that much of the fracking in the US might not be profitable at today’s oil prices, implying that companies might exercise their freedom and stop fracking.
- Self-interest is a driving force. This is also shown by the idea that companies will stop fracking if the price of oil drops too much. Companies are interested in making money, not in doing what is best for their countries or anyone else.
- Competition among buyers and sellers is a controlling mechanism. This is shown in the reasons for the drop in prices. As sellers compete to sell oil, the price drops. The sellers were competing to sell because the price had risen, causing the sellers to want to make money by producing more oil.
- Markets and prices. This is related to the previous characteristic. It is the market that is causing the price to drop. No government can simply decree that the price of oil will drop world-wide. Instead, markets determine prices.
- Reliance on technology and capital goods. This is related to the article because the production of oil would be impossible without technology and capital goods.
- Specialization. This is implied in the article because some companies and some countries that are geographically lucky specialize in the production of oil.
- Use of money as a medium of exchange. This is shown in the article because it is discussing exchanges of money for oil. It is talking about the price of oil in dollars, not in some sort of other good or service that is bartered for the oil.
- Active, but limited government. This is not shown much in the article. Many of the countries (like Saudi Arabia) that are mentioned do not really have very limited governments.
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