[OPE-L:6231] economics of oil production

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Wed Nov 28 2001 - 14:57:27 EST

a reply from Cyrus Bina to Christian Gregory.

Dear Christian:

I have indicated in The Economics of the Oil Crisis that "[I]t is not always
the case that the market value is the same as that of the marginal producer"
(p. 52).  Regulating market value in the oil industry emerges from two
sources: (1) the magnitude of "normal capital" and (2) the marginal
oilfields.  In the case of the cost of US oil, the fact that the price of
Middle Eastern oil has increased manifold during the 1973-73 left the door
open for the most unproductive oilfields in the world to produce
continuously, while former extracted a huge oil rent.  At the same time, oil
price decline of the late 1980s has led to capping of numerous oilfield in
Texas, Oklahoma, etc., pointing to the fact that regulating market value of
oil has changed.  This later change indicates that within the least
productive oil region of the world, namely US, the lesser productive ones
had to be capped.  I have pointed out in my oil book that "Since the effect
of differential oil rent of the first type (DRI) cannot be separated from
differential rent of type two (DRII), determination of the least productive
oil region in conjunction with the identification of normal size of capital
investment, is an impossible task.... Following Marx's method, we ere able
to identify the specific oilfields upon which the social value of value was
formed" (p. 52).  How: whereas Marx hypothetically increased and decreased
the prices of agricultural products in his scenario analysis in Volume 3 of
Capital in order to show what portion of total supply determines the market
value, I had before me a real case of price increase in 1973-74 period and
that was ready to be corresponded with high oil exploration and development
expenditures in the United States.

I hope it would be satisfactory.  The key here is that, before attempting to
read my book, Marx's Vol. 3 (all six chapters on rent) must be mastered.

Best wishes,

Cyrus Bina

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