Economic Activity of the Saudi Aramco Company, as a Monopoly - Essay Example

Introduction Monopoly, in economics, is a market arrangement in which an individual or enterprise wield sufficient control over deciding the supply side of producing any good or service. Monopolist therefore, in economics jargon, is the lone seller of a product or service as in monopoly; the entry into the market is restricted due to artificial as well as natural trade barriers. Governments, often, are behind the creation of monopolies in order to control the production as well as prices of certain products or services such as utilities and other products of strategic nature. In perfect competition, there are many sellers and buyers with sellers have little incentive or opportunity to earn abnormal profits. However, what is most important is the fact that in perfect competition, there are homogeneous products to buy and sell with many buyers and sellers however, in monopoly, though product may be homogeneous, seller is only one. While discussing monopoly from the view point of a consumer, it can be easily argued that consumers have to make just one simple choice of whether to buy the product or service or not. Since most of the monopolies are utilities i.e. with inelastic demand, therefore, consumers are left with only limited choice of purchasing from a single seller. What characterize a monopoly is not often unique or complex however; monopolies are few and mostly work under the auspicious of government. This paper will discuss Saudi Aramco, one of the largest oil producing companies in the world and is controlled by Saudi Government besides discussing how government can block the emergence of private monopolies. Saudi Aramco Saudi Aramco is the largest oil companies in the world which produces, manufactures, markets oil and natural gas products all over the world. Being the largest, it is also considered as one of the strategic assets of Saudi Arabia as it works under the protection of Saudi Arabian government and is considered as a monopoly over the oil in Saudi Arabia. Besides operating as a single operator within country, it also operates the largest oil field in the world. Though it is not a monopoly over the oil production and marketing in the world but if we limit ourselves to just one country, it can easily be inferred that Saudi Aramco is probably one of the largest monopolies of the world with significant influence over OPEC - the largest cartel of Oil producing countries to decide upon the production as well as pricing of oil products in the world. The total reserves of Saudi Aramco are over 250 billion barrels covering a total area of more than 249 trillion ft. (ArabianBusiness.com). The company is not only operating in the land area of the Saudi Arabia but it has also complete rights over the waters in Arabian Gulf and Red Sea. What is most important is the fact that despite being a monopoly, it is considered as one of the most efficient and finely run organizations in the world with revenues in billions of dollar. The next section will discuss what are some of the characteristics which categorize Saudi Aramco as one of the largest monopolies of the world. How Saudi Aramco is a Monopoly Single Seller One of the strongest characteristics of monopoly is the fact that it comprises of only one seller and whole industry comprises of only one player in the market. In monopoly, the single seller provides the whole supply in the market. Saudi Aramco is the only seller in Saudi Arabia which has the exclusive rights over the supply of oil and related products in local market as well as international market. Unique Product In economics, a unique product is one which does not have any close substitute for the products and services produced by the monopoly. The uniqueness of the product therefore not only provides no competition to the monopoly thus giving it an absolute control over the supply of particular good or service produced by the firm. Though there are substitutes of oil i.e. ethanol, biodiesel but they are still in the initial stages and the commercial production of such products are still in preliminary stages therefore Saudi Aramco produce a product which is unique in nature as it has no close substitutes. Impossible Entry In perfect competition, there are no barriers to entry or exit in the market however, in monopoly there are strong barriers which make the entry into the market an impossible task. These barriers can either be natural as well as artificial. Natural barriers can include high cost of entering the market etc whereas artificial entry barriers include the restrictions imposed by the government to enter into such markets. (Irvin B Tucker). Saudi Government restricted the entry into oil market in order to give absolute rights to Saudi Aramco to operate as the only oil producing company in the country. How government do not allow private monopolies Governments often do not allow private monopolies because of the fears that the social costs of allowing such monopolies may increase. As most of monopolies deal in products is services with inelastic demand curve i.e. increase in price hardly increase quantity demanded therefore there are always substantial chances that the private monopolies may continue to charge prices which may exceed the generally acceptable levels and can create significant social unrest. For example, if Saudi Aramco is a private monopoly than it could increase the prices of oil to a level where it may no longer remain within the budget constraints of a consumer. Deadweight Loss and price discrimination No matter what, a monopoly always works to search the prices therefore it will continue to produce and reduce price as long as the marginal revenue exceeds marginal cost. (Gwartney, Stroup and Sobel). Therefore, restricting the output with respect to price result into the deadweight loss because before achieving equilibrium a monopoly will attempt to produce that combination of goods and services at which marginal revenue exceeds marginal cost. (Mansfield and Yohe). For example, for Saudi Aramco, the cost of producing oil is more or less fixed i.e. the overall costs does not change in short run however oil prices do change therefore this mismatch of marginal cost and marginal revenue may produce deadwieght loss for consumers. Works Cited 1. ArabianBusiness.com. "Saudi Aramco is looking ahead." 17 September 2008. http://www.arabianbusiness.com. 01 December 2008 . 2. Gwartney, James D, et al. Economics: Private & Public Choice. US: Thomson, 2003. 3. Irvin B Tucker. Microeconomics for Today. Cincinnati: Ohio South-Western College Publishing, 1999. 4. Mansfield, Edwin and Gary Yohe. Microeconomics. New York: W.W. Norton & Company Ltd, 2004. Read More