Petroleum Economic and Oil field management 2013-2014 Essay

Petroleum Economic and Oil field management 2013-2014 - Essay Example Secondly, the natural gas industry requires a firm that has financial muscle to produce the natural gas because it is an expensive venture. Such a firm will have excessive power to dominate control, and regulation initiatives even from governments especially if it is a multinational company. The natural gas industry mainly operates through pipeline transportation and distribution aspects, which are naturally monopolistic because they are characterized by high fixed costs and long lead time making duplication uneconomical. This creates a wide barrier to entry for potential participants and competitors. They also require price and non-price regulation. Without effective regulation, the natural gas industry can develop into a natural monopoly. In fact, price regulations sometimes fail to control the prices because such prices depend on various factors such as production costs, inflation and transportation costs among others (DiLorenzo, 1996:45). In situations where governments run the natural gas industry, the industry turns to state monopoly such as in Mexico. The Mexican government introduced a program of reform in 1988. However, it was until 1995 that reform in natural gas industry began to include private companies. However, before this, state owned firms controlled the industry making it a monopoly. In fact, even after the entrance of private firms state owned firms still ruled the market making it a state monopoly (Joskow, 2007:1227). Q1 represents entire size of the market. Point E1 is the equilibrium that cooresponds to quantity at Q1 and determines the price at P1. Thus, when there is one firm only producing natural gas, the marginal cost of supply is P1 and is lower than the duopoly price P2. Thus, the presence of one firm in the market will be price efficient compared to two firms. If the natural gas industry