possible
A news article on production of oil and natural gas in the Permian Basin of western Texas and New Mexico noted the following two facts:
i. "Shale drillers in the Permian Basin are producing vast amounts of gas as a byproduct of prospecting for oil."
Submit quiz
ii. "Gas prices in parts of the prolific region hovered near zero last month and some trades went negative, to as low as a negative 25 cents per million British
thermal units...."
Source: Rebecca Elliott, "In Booming Oilfield, Natural Gas Can Be Free," Wall Street Journal, December 27, 2018.
a. What does it mean for a price to be negative?
A negative 25-cent price means that
OA. the seller has to pay the buyer 25 cents so that the buyer agrees to receive the product.
B. the product is worthless and should not be continued to be produced under any circumstances.
C. the seller is unable to transact in the market at all.
OD. There is no such thing as a negative price-the article is using incorrect language.
b. Why would firms drilling in the Permian Basin continue producing natural gas if they receive a zero or negative price for it?
OA. Firms continue to produce natural gas because it is their main business, and they are hoping the price will go up soon before they are forced to go out of business.
OB. Firms continue to produce natural gas because many consumers use it,
in addition to other things, to heat and cool their homes, so continuing production is the moral
thing to do, even if they are incurring a loss.
OC. Firms continue to produce natural gas because it is a byproduct of producing oil, so long as oil is profitable enough to cover the price of disposing of the natural gas,
the firms will continue to produce it.
OD. Since the price for natural gas has gone below zero, firms drilling in the Permian Basin should stop producing it immediately.