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Coronavirus Adds to Pressure for U.S. Oil Industry American oil producers are bracing for the latest shock to hit world energy markets: the economic effects

Coronavirus Adds to Pressure for U.S. Oil Industry American oil producers are bracing for the latest shock to hit world energy markets: the economic effects of the coronavirus outbreak on China and beyond. Oil and natural gas producers have been suffering from low commodity prices for the past year and now expect a sharp drop in global prices for their products. As a result, they are preparing to slash investments in exploration and production. The price of West Texas intermediate crude, a key benchmark, fell to $49.61 on Tuesday, a 20 percent decline in less than a month. For producers in places like Iraq and Saudi Arabia, that kind of price drop can mean a 10 percent loss in profits. But in the United States, where the break-even price for the average oil well drilled in shale fields is far higher at roughly $45 a barrel, some producers could lose as much as 60 percent of their profits, according to Michael Lynch, president of Strategic Energy and Economic Research.

(i) Oil is a globally traded commodity whose price per barrel is determined by global forces of demand and supply. A small individual oil company (such as those in Oklahoma) has no control over prices. Using suitable diagram(s), explain why such a firm is in dire straits. (ii) If the price were to fall below the "break-even," level of $45 would it make sense for these small firms to continue to produce? Explain your reasoning.

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