ECS1501
Assignment 3
DUE 21 July 2025
, ECS1501
Assignment 3
DUE 21 July 2025
Question 1: Market Conditions in the Oil Market (12 marks)
(i) Market Condition Depicted in the Cartoon
The cartoon illustrates a surplus condition in the oil market, characterized by an
excess supply, where the quantity of oil supplied exceeds the quantity demanded at
the prevailing price. This disequilibrium typically arises due to factors such as
overproduction, diminished global demand, or geopolitical strategies that sustain
high output levels even as prices fall.
Underlying Assumptions
• The market operates under perfect competition, allowing prices to adjust freely
to restore equilibrium.
• There are no government-imposed price controls (such as price floors or
ceilings) that restrict price movements.
• Producers are profit-maximising agents, responding rationally to market
signals and price fluctuations.
Critical Reflection
Although classical market theory explains the surplus as a temporary imbalance that
self-corrects through price adjustments, this view oversimplifies the realities of the
global oil market. In practice, price stickiness often results from long-term contracts
and strategic behaviour by influential actors such as OPEC, which may maintain or limit
production to stabilise prices, regardless of excess supply (World Bank, 2025).
Moreover, persistent surpluses indicate resource misallocation, posing significant
economic risks for oil-exporting countries whose fiscal stability depends on predictable
and sustained oil revenues. These complexities underscore the limitations of purely
theoretical models in capturing the structural and strategic dimensions of the oil market.
Assignment 3
DUE 21 July 2025
, ECS1501
Assignment 3
DUE 21 July 2025
Question 1: Market Conditions in the Oil Market (12 marks)
(i) Market Condition Depicted in the Cartoon
The cartoon illustrates a surplus condition in the oil market, characterized by an
excess supply, where the quantity of oil supplied exceeds the quantity demanded at
the prevailing price. This disequilibrium typically arises due to factors such as
overproduction, diminished global demand, or geopolitical strategies that sustain
high output levels even as prices fall.
Underlying Assumptions
• The market operates under perfect competition, allowing prices to adjust freely
to restore equilibrium.
• There are no government-imposed price controls (such as price floors or
ceilings) that restrict price movements.
• Producers are profit-maximising agents, responding rationally to market
signals and price fluctuations.
Critical Reflection
Although classical market theory explains the surplus as a temporary imbalance that
self-corrects through price adjustments, this view oversimplifies the realities of the
global oil market. In practice, price stickiness often results from long-term contracts
and strategic behaviour by influential actors such as OPEC, which may maintain or limit
production to stabilise prices, regardless of excess supply (World Bank, 2025).
Moreover, persistent surpluses indicate resource misallocation, posing significant
economic risks for oil-exporting countries whose fiscal stability depends on predictable
and sustained oil revenues. These complexities underscore the limitations of purely
theoretical models in capturing the structural and strategic dimensions of the oil market.
