World Oil Markets

Question: Let’s assume that there has been a significant decline in the real price of crude oil. Now, many producers and consumers believe that oil prices will remain low for an extended period. In addition, real interest rates (interest rates adjusted for inflation) have dropped and remain low. The causes and consequences of these changes can be understood using many of the ideas taught in class. Use these ideas to answer the following questions. a) Is such a price decline consistent with the Hotelling model of prices and production for a competitive oil market? Using the principles outlined by Hotelling, describe a mechanism that could cause such a collapse. b) Suppose that the oil market is controlled by a monopolist. Compared to your answer for part (a), would production and price change more or less, faster or slower?