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Competition in the U.S. Energy Industry
Chapter Three Conduct
An analysis
of competition cannot rest solely on a study of market structure.
While structure may be a partial determinant of market conduct and
performance, wide variations in conduct are consistent with a given
structural setting. As a result, implications concerning the
viability of competition derived from an analysis of market
structure can only be confirmed by an analysis of market conduct
and performance.
CRUDE
OIL
In
competitive markets, prices tend to reach the level at which
quantity demanded equates quantity supplied; at the competitive
equilibrium price, the opportunity cost of the last unit supplied
just equals the value of the last unit demanded by consumers. Such
an equilibrium represents an optimum allocation of resources.
Competitive markets are a mechanism which, under definable
conditions, continuously seek the optimum allocation of
resources.
In the
domestic crude oil industry, price policies are determined largely
by government policies rather than by demand and supply forces.
Government intervention has been systematic and comprehensive
ranging from policies designed to stimulate production to policies
which attempt to control output in order to support crude oil
prices. As a result, resource allocation decisions are mainly the
result of government decision-making and the role of competition,
in the sense of freely fluctuating prices equating quantity
demanded to quantity supplied, is substantially reduced.
The
domestic crude oil industry has historically suffered from a
problem of excess production capacity. The existence of chronic
excess capacity indicates that competition is not allowed to
exercise its allocative function. The price mechanism has, in
effect, been prevented from equating quantity demanded to quantity
supplied.