The oil industry supports numerous activities throughout the globe through the provision of energy needs. The industry relies both on foreign and domestic oil although foreign oil is the most exploited considering that most countries lack this important resource. The industry is faced with numerous market failures that relate to marginal cost, monopolistic nature of the oil sector and increment in the global oil prices. However, other market failures are present within the industry, considering its global participation in supplying oil.
Firstly, the enormous gaps exist on marginal cost of supplying oil and the marginal cost required for supplying the globe with energy alternatives or oil substitutes (Riley, 2008). Additional resources are required in the production of alternative energy resources that may be utilized as substitutes for oil. This is considered a huge market failure, which is inevitable for all global players.
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Secondly, the monopolistic nature that exists within the industry allows oil business players in controlling oil supply to the world (Ristau, 2010). The business players heighten oil prices by playing with supplies and demand. Oil producers are capable of flexing thus leading to intense market failures, which may necessitate government or trade interventions (Ristau, 2010). However, the matter relies of the oil business players and cannot be controlled through any of the suggested tools.
Thirdly, augmenting oil prices is carried out by institutional shareholders and further offers or incentives regarding oil exploration instead of offering certain incentives for technologies that are not related to oil exploration (Riley, 2008). The investors involved in the oil business offer the rare commodity to consumers worldwide at elevated costs and provide incentives to individuals with novel oil exploration technologies (Ristau, 2010). The industry’s investment on new oil exploration demonstrates market failure since the fate of the industry is uncertain, considering that no estimates exist on the remaining oil reserves. Instead of investing in these technologies, investments should be directed towards alternative energy whose providence can be quantified.
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