The article discussed the potential of Iraq as a major oil supplier. Draw a hypothetical demand and supply of Iraq petroleum before and after all their oil refinery projects were established. Thus you will depict two equilibrium prices. Explain the movement of prices in the market by identifying the factors that may cause these shifts. Iraq's Attempt to Increase Refining Capacity MeetsEconomy of Scales ChallengesEconomies of scale are the strength of a large firm. It is a competitive edge of large firmsthat can produce more units on a larger scale, reducing the average input cost. Bydecreasing the average price, large firms can realize economic growth.In his book, The Wealth of Nations, Adam Smith identified the two elements to attain theeconomies of scale are the division of labor and specialization. Labor, which is the variableinputs in the function of production, can increase productivity if they are required to focusonly on specific tasks and improve their skills. Thus, by increasing labor productivity, the firmcan reduce time and increase production.Conversely, the diseconomies of scale, the opposite of the economies of scale, exist. It is acondition the output is in less proportion with the inputs. The absence of skills training andobsolete technology contribute to the firm's inefficiencies-consequently, the average costincreases.Economic planners serious about economic growth wanted industries to increasecompetitiveness through economies of scale. Specifically, financial experts in countries richwith natural resources knew that processing these resources into commodities is an excellentsource of potential wealth for the country. In the case of Iraqis, recently rising from years ofconflict, it is eager to rebuild its economy. The government needs a massive inflow of dollarsto finance development. As the second-largest producer of oil in the OPEC, Iraq wanted toboost its refining capacity to achieve the economy of scale.The target is to reach more than 900 thousand barrels per day in the first quarter of 2022.However, the current pandemic thwarted the plan. Lamentably, the country is rich inpetroleum, may remain a net importer of gasoline until 2030. The mismatch between thedomestic demand and production of gas may stabilize if there are new investors. The Iraq oilminister revealed plans to build new refineries to sustain the production of oil.Current refinery projects focus on the economies of scale due to lack of enthusiasm for theseprojects among OPEC members. For instance, ARAMCO included its refinery project as partof the industrial sector development in the Jazan region. Also, Kuwait, the Zour refineryproject, is part of a petrochemical facility.In an interview, the vice president of refining, chemical, and oil markets raises the entity'squestion to build refinery projects in Iraq. The hesitation in proceeding with the projectcomes from expecting more than the return on the project. Unfortunately, only France's Totalwas interested in the project. On the part of the financers, there is a complete lack ofinvestment interest. The lack of safety and security adds to the project risk level, whichcontributed to refinery projects' unattractiveness. These issues, including the infrastructurechallenges, need to be resolved first.Diseconomies is the very thing that new refinery projects must avoid. Low managerial andlabor policies and deteriorating infrastructure, and inadequate maintenance are the primarysources diseconomies. Moreover, as the number of projects increased, their market scopemay also increase. Consequently, expanding the range of industrial activities may increasethe average cost resulting in a decline in inefficiency.Since some efficiencies and inefficiencies are location-specific, the location chosen for theproject may increase efficiency. Alternatively, both arise from the presence of additionalinfrastructure with careful planning and implementation.

The markets are the place where the buyers of various different goods and services tend to meet and…

Answered: The article discussed the potential of…

14th Edition

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Author:NEWNAN

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Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC