Reference no: EM132511746

Recent events have combined to create highly unusual market conditions for the global oil industry. First, two large oil producers in the global market embarked on a price war, with sudden and dramatic effects on global oil prices. Second, the coronavirus pandemic affected the global oil market through a dramatic reduction in transportation and industrial production.

Consider a small country with a single state-owned oil producer supplying to a competitive global oil market. This oil producer is operating as one price-taking firm in a large competitive market, and has no international agreement with any other global producer. Until recently, this firm was able to earn an economic profit, due to having a comparative advantage in the production of oil compared to other countries. However, the firm is now in a position where their revenues have fallen below their operating costs, and they need to shut down operations unless the government is willing to cover the gap.

Provide an economic analysis to illustrate and explain how the events in the global oil market affected this firm. Provide a commentary of what you think might happen if in the long-run. If the prices return to pre-pandemic levels, would this oil producer be able to return to earning economic profits in the long-run? Why, or why not?