[OPE-L:6162] Re: oil rent

From: Gerald_A_Levy (Gerald_A_Levy@email.msn.com)
Date: Tue Nov 06 2001 - 11:03:56 EST

Re Patrick's [6161]:

> I follow the application of the theory of differential rent to the
> international price of oil.
> There are however three caveats. First, I think the theory has to be
> applied to "oil sites" (possibly, firms) and not to regions. For example,
> when the price of oil tumbled severely in the late 1980s after the Saudis
> flooded the international market with oil (because they were angry at
> cartel members who would not uphold cartel agreements) many wells in the
> were permanently closed. Many however remained opened. Large firms, like
> Exxon, will have many high and low cost sites. So, the appropriate unit of
> analysis is the marginal oil field - not the nation, region, or even firm.
> Marx applied his theory of differential rent to the marginal acre of land,
> where the aggregate level of consumption determined the total amount of
> required agricultural product.
> Second, the OPEC members have different time horizons - even as many may
> have similar low costs of extraction. The Saudis have a great deal of oil
> and do not wish to have a regime of high prices, as this would cause a
> speed up in the use of oil substitutes and thus diminish the value of
> overall stock. Other OPEC members have much less oil and thus would like a
> regime of very high prices, since substitution away from oil is not a
> viable solution in the short and they will not have any oil in the long
> Three, the issue of political stability. Those countries with highly
> unstable elites might wish to have very high prices for two reasons. One,
> it generates the high profits necessary to buy off internal opposition.
> Two, they'd looked down the road and discovered that they, i.e., the oil
> barons, will not be in power much longer; hence, they wish to sell all the
> oil they can now and profits in US treasury bonds.

These are *very good* points, especially 1&2 . (But,  '3' strikes me as
somewhat speculative, i.e. while 'political stability' is certainly an issue
in the mix I don't  know whether the concrete possibilities that you
have in fact happened in this instance -- you seem to recognize this with
word 'might' above).

What I found striking by its omission in the explanation by Cyrus Bina
[see 6160] was any reference to cartels and OPEC in oil price

This is perhaps understandable when one considers the last
couple of decades when OPEC  has functioned very imperfectly as a cartel
(I think it would be more accurate to call it a *quasi-cartel*) What
is crucial in terms of the effectiveness of a cartel is the unity and
solidarity of cartel members. Yet, for a very long time this unity has
been lacking and OPEC has functioned more as a cartel in name only
rather than a functioning cartel.  This was not an accident, however,
but was rather a result manipulated to a large degree by the US
government which put pressure on the Saudi government (and the
Kuwaiti government) to sell oil at lower prices and increase oil
production. I see *part* of the struggle in the region as a struggle
between forces who want to recreate OPEC as a functioning
cartel and those who want to preserve it only as a toothless

In solidarity, Jerry

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