The global oil market is actually best described as an oligopoly.There are also a number of small producers which are price takers in the global market where price is determined by larger firms. They are so small and unimportant individually that they cannot influence the world price by varying their production.

Due to the recent events of the coronavirus pandemic and large oil producers in the global market embarked on a price war, with sudden and dramatic effects on global oil prices. Consider an oil producer that is operating as one price-taking firm in a large competitive market, and has no international agreement with any other global producer. Until recently, this firm was able to earn an economic profit, due to having a comparative advantage in the production of oil compared to other countries. However, the firm is now in a position where their revenues have fallen below their operating costs, and they need to shut down operations unless the government is willing to cover the gap.

Illustrate in a diagram to show pre-crisis when firm makes profits and during crisis when firm makes loss. Explain how events in the global oil market affected this firm. What will happen in the long run, and what might constrain the firm from going back to earning economic profit in the long run? Is economic profit possible for this firm, in the long-run?