[OPE-L:6223] Re: economics of oil

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Mon Nov 26 2001 - 17:35:58 EST

yes i see how ill formed my question was in the first place: we can't 
speak of anyone selling below the global market price unless we have 
some theory of how the latter is formed in the first place.

yet there remains (I believe) the question put forward by Patrick.

Let me first quote your analysis from the URPE newsletter, Fall 1995 (p.13):

"During the oil gluts, when the larger supply of oil from more 
productive regions is rendering the production from the least 
productive regions unprofitable, the magnitude of the global 
differential productivity decreases. Conversely during the oil 
shortages the magnitude of global differential productivity 
increases. Persistent gluts thus would correspond with the smaller 
amount of differential oil rents and enduring shortages with the 
larger ones. This universal rule applies equally to both OPEC and non 
OPEC oil nations alike. That is why OPEC oil revenues are no longer 
immune from the determining  (and often undermining) imact of (spot) 
oil prices in the global oil market. Therefore, OPEC may seem the 
'clumsy cartel, as it apears to MA Adelman of MIT, during the gluts 
and tactful during the shortages. Adelman thus confuses the 
competitive formation of differential global oil rents with the 
anachronistic notion of a global cartel...OPEC's challenge, far from 
indicating the formation of a country cartel, was a direct 
consequence of the post cartelization of the oil industry. In 
reality, the so called OPEC offensive was, in effect, an offensive 
against the system of administrative pricing that allowed the 
companies to make large profits, while also skimming off the lion 
share of the differential rents that could have otherwise been 
received by the ownersof the oil in place."

Now I believe that one way of reading Patrick's question is  this: at 
times of shortage do the Sa'udis undermine their own short term 
maximization of revenue by ramping up production  which (ramp up of 
production) is intended both to prevent a switchpoint to backstrop 
technology that would undermine the value of massive Sa'udi reserves 
and to maintain the US' good favor?

  That is, does the US indeed have an interest in more than just the 
disbursal of Arab oil rent--as you emphasize--but in the actual 
control of the output and pricing decisions of  the Sa'udi 'swing' 
producer in particular? After all, there are those famous quotes from 
Yamani in the mid 70s about how the Sa'udi flooding of the market 
helped to prevent communists coming into power in Western Europe.

In the latest Nation Ken Silverstein quotes U Penn Professor Robert 
Vitalis on the importance of controlling Sa'udi output and pricing 

I do believe that the importance of Sa'udi Arabia is being 
exaggerated here, and as you have argued, this exaggeration does have 
the implication of justifying aggressive imperialist control of the 
Arabian Peninsula, no matter the stated politics of the analyst.

So I just wanted to restate the objection so that I can better 
understand your answer.

All the best, Rakesh

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