Petroleum Economics - Role of Price in the Functioning of Proration

Price is a complicated concept, for price is both a cause and an effect. This reciprocal aspect is commonly overlooked and the oversight is the source of many economic maladjustments. Price is the resultant of the ratio between supply and demand, but it differs from a mathematical concept of a proportion, by itself constituting an economic force which continuously alters the elements that determine the relationship. Price, therefore, is not merely the outcome of other forces but is in its own right one of the most powerful of economic agents. Price accordingly does not play a passive role; nor can it be sterilized or rendered inactive. In consequence, price cannot be fixed or at least kept fixed, except by the elimination of all freedom of choice on the part of producers and consumers. A primary objective of all economic activity is equilibrium. The same is true of a unit of economic activity, the single industry. The plane upon which equilibrium centers may shift in the course of time, but equilibrium itself is the point of departure and the point of return. If an industry is in equilibrium, that industry is operating effectively. The motivating forces of an industry—profits or the common good—are not to be confused with the prerequisite of equilibrium, but this mistake is often made. The producer is dominated by the profit motive; the consumer, or his collective representative, by the general welfare motive. No one is the advocate for equilibrium; that status is supposed to be arrived at automatically. If the forces of competition are perfectly free, such is the tendency. Equilibrium For the purposes of this analysis, equilibrium needs to be broadly defined and is conceived to involve: (1) balance between supply and demand; (2) internal equipoise amongst the elements within an industry; and (3) symmetry in respect to the whole economy. This definition implies flexibility and case of adjustment; a ready accommodation to change. Equilibrium does not postulate profits or nonprofits, social objectives or the lack of them. A decadent industry may be in equilib-