Question
1.) On April 20, 2020, The Dallas Morning News published the following: The price on the May futures contract for West Texas crude that is
1.)
On April 20, 2020, The Dallas Morning News published the following:
"The price on the May futures contract for West Texas crude that is due to expire Tuesday fell into negative territory minus $37.63 a barrel. That's right, sellers were actually paying buyers to take the stuff off their hands. The reason: With the pandemic bringing the economy to a standstill, there is so much unused oil sloshing around that American energy companies are running out of room to store it.
Underscoring just how acute the concern over the lack of storage is, the price on the futures contract due a month later settled at $20.43 per barrel. That gap between the two contracts is by far the biggest ever."
Advanced knowledge of futures contracts is not required to get the basic idea: sellers of oil for delivery in May were willing to pay others to take their oil, while at the time of the article sellers were still expecting to be paid (albeit a much reduced amount relative to one year ago) for barrels of oil delivered in June.
A simplified version of this story can be represented using the model of a single non-renewable resource firm's extraction problem over two periods introduced in AEC 351. Using a two-way graph, draw a situation in which a firm extracting deposit of crude oil would choose to extract nothing (or "store "the oil in the ground, for free) in period 0, and then a positive amount of crude oil in period 1. In a few complete sentences, briefly explain why the scenario implied by the marginal net benefit curves in your graph result in this prediction for extraction choices.
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