Economic News Analysis
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In Colombia the guerilla group F:A:R:C attacks on Ecopetrol’s pipeline increased more than triple this year. This has caused that the best-preforming oil company in Colombia, which in addition belongs to the state to reduce its production targets drastically. The guerrilla group have attacked this company various times because it generates a great income for the state, and many of these incomes funds the military which since the precedence of Juan Manuel Santos has increased its intensity on attacking the guerilla. According to reports the main well located in Putumayo have only been able to work with an efficiency of 50% compared to their average production capacity. This leads to a loss of approximately $1.8 million a day, in addition the repair of the environmental cost will mean that they will have to pay a cost of $310,000. Yet though anyway Ecopetrol is an extremely strong and important firm for Colombia’s national economy and the shares however are still holding strong and have returned a market value of more than $50 billion. Commentary:
The first thing that is most certain for this news is that there is going to be an inevitable negative effect on the quantity of oil supplied. This is because many of their pipeline machinery has suffered consequential damage therefor the company must allocate its resources, and capital in to repairing the damage while not in to in to its production. To represent this graphically I am going to use a production possibility curve where I will compare investment in production to investment in repair. Point “a” will be before the guerilla attack and point “b” will be after. The axis will be labeled from 1 to 5 but these will only symbolize magnitudes to take in comparison
As we can see in this visual representation in point a (before the attack) there is a there is a very large magnitude of production in comparison to point b (after the attack). This means that when the company doesn’t have to concentrate its workforce on the repairing of pipelines, there is a much higher rate of production therefore the company is able to supply more quantity and gain more income. Yet though like the attacks have caused colossal damage the production rate is going to go down drastically, because now the central focus of the company will be to get the pipelines up and running.
From what we have just argument we can now establish that this change in workforces and capital concentration is going to reduce the over all supply of the company. By being an external factor in the category of factors of production, more specifically capital and labor it means that it will cause it will cause an shit in the supply, and in this case by causing a reduction the quantity of oil produced and allocated it will mean that the supply curve will shift to the left. We can see this in the graph of supply and demand (right).
As we can see in the graph from changing the supply from S to S2 the firm has had to search for a new equilibrium price (P2,Q2) this is because by having to suddenly reduce the quantity supplied there is going to be an excess demand, to control this, the company will have to raise the price for the consumers. This will cause a certain present of the consumer stop buying the product and will allow the excess demand to reduce back to its equilibrium.
On the positive side for Ecopetrol, it is the main supplier of oil in a national scale and internationally it is one of United States Key suppliers along with United Arab of Emirates, and Iran. This means that the quantity demanded oil will not have to much of a significant shift when the price raises. Consequently it has an inelastic demand. We can observe this effect in the following graph. It is clearly visible that by having to raise the price for the consumers from P´2 to P´1 the change of the quantity demanded is minimal. Apart from the fact that Ecopetrol is a really important company nationally and internationally, this minimal change in the quantity demanded is easily explained that by the importance of oil in a global sense. It is the most demanded product and the most important for the functioning of most industries and transportation