Assume Daewoo, a hypothetical oil extraction company, has the
following cost structure. It spends:
• $40/barrel on labor costs, raw materials, energy, and • $35/barrel
on interest, depreciation, insurance, and administrative staff
expense.
Read the textbook carefully, and answer the following questions.
- A recession hits, the market price of crude oil falls to $50 per
barrel, and the profitability takes a hit. Should Daewook keep running
the mine? Elaborate.
- China’s reopening started impacting the global economy, increasing
the oil demand. As a result, the market price shoots up well above $100
per barrel, and all its competitors announce new expansion plans. Should
Daewoo add the new capacity? Elaborate.