Oil – lots of profits and high risk

Here’s an article on the oil industry from The Economist which  nicely illustrates the economic principle that price is equal to the marginal cost of the last unit produced.

The big oil companies are raking in the profits from oil fields discovered and developed when costs were lower and for which they now receive the higher prices.   At the same time they feel a need to invest in more difficult to obtain oil in politically unstable parts of the world – a double risk.  As well as risk from political changes there are also risks if the price of oil were to drop making these new sources uneconomic.

If I were the chief executive of one of the big oil companies I would want to consider just taking the profits and forgetting the search for new oil.

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