[OPE] Cyrus B, "Oil, war, lies and bulls**t" (3/4)

From: <glevy@pratt.edu>
Date: Sat Oct 11 2008 - 16:59:22 EDT

Asia Times Online :: Asian news and current affairs

9, 2008

Page 3 of 4
Oil, war, lies and
By Cyrus Bina

regions, thus turning the
emerging differential oil productivities into differential oil rents -
side by side with a competitive profit. As a consequence, these
differential oil rents are not only price-determined but are themselves
the effect of competition and competitive pricing of oil. And, by
implication, OPEC is not a "cartel" but simply a rent-collecting

The orthodox view (and similarly the
self-described heterodoxy), however, takes its point of departure from the
bygone cartelized era, before lumping OPEC and the rest of today's
globalized oil together into an eclectic conspiratorial collage. The case
in point is Paul Cummings who - not quite unlike Klare - starts with John
D Rockefeller's oil monopoly and decidedly ends up with a cartel

and monopoly, without detecting a hint of circularity in his

An implicit hint of control and conspiracy does also
emanate from Michael Hudson's view of oil (Counterpunch, June 2008). He
explicitly attributes the "the cause of soaring oil prices" to
"the Iraq War [which was supposed to lower them, not raise them] and
to the contribution of US overseas military spending to the
balance-of-payment deficit, and hence to the plunging dollar on world

Here, the reader should notice a tendency of a
doubletalk in this supposedly heterodox verdict. For it would be a bit
bizarre to attribute the cause of the US invasion of Iraq to an increase
and, at the same time, a decrease in the price of oil.

In a
similar methodological approach, Paul Davidson, the guru of post-Keynesian
economics, on the one hand speaks of "OPEC Cartel," and on the
hand invokes the Marshallian notion of "user cost" in order to
demonstrate the cause of oil price hikes in the summer of 2008. The
so-called user cost is an axiomatic construct that relates the present and
future price of oil, given the expected increase of the latter. However,
by appealing to this (axiomatic) concept alone - without an independent
empirical examination - the question is moot. Nevertheless, even if one
accepts this proposed deduction, which is simply a tautological construct,
one needs to search for a deeper cause behind the sudden facade of these
expected increases in the price of oil. Davidson, however, tends to blame
OPEC, rather speculatively, without focusing on the action of speculators
- those who buy and sell oil short in Wall Street, by churning the
"paper barrels" for a quick profit.

discounts the fact that OPEC is seen more than ever worried about
speculation in futures markets and thus hopelessly seeking a way out of
this short-run instability that jeopardized its long-run revenue and
future differential oil rents. But, alas, for Davidson, OPEC's
price-determined differential oil rents are but "monopoly

To recapitulate, the production of oil from the
least productive oil region is entitled to a competitive profit. This
reflects a normal rate of return on capital investments that,
notwithstanding the risk and uncertainty, move rather competitively in and
out of the industry on a regular basis. By comparison, oil production from
more productive oil regions is entitled to a differential oil rent, in
addition to normal profit.

In this manner, the long-run price
of oil is set by the US oil production price (US regional oil cost, plus
competitive profit), which in turn represents the gravitational center of
short-run fluctuations of oil prices worldwide.

This also has
a considerable implication for the question of environment and the issues
that are hanging in the balance in the view of the popular but fictitious
desire for "self-sufficiency" in oil and energy in the United
States. That is why, so long as the production from least productive US
oilfields is to continue, the measly production from new explorations,
such as from the US Outer Continental Shelf and/or Alaska's National
Wildlife Refuge (more productive US oil provinces) would neither change
the center of gravity (the long-run price) nor markedly reduce the
short-run price of oil in the US.

Again, this is not because
of the alleged "oil monopoly" invoked by popular wisdom, but
because of the very fact that these differential oil rents are an outcome
of competition among the lesser- and more-productive oilfields; and thus
least-productive oilfields are merely entitled to competitive profit,
without rent.

Given my ample demonstration elsewhere, I also
wish to point in passing that absolute rent is undoubtedly not applicable
to the oil industry, and that the formation of differential rents are an
outcome of successful movement of capital (shown by a higher than average
composition of capital) in and out of the oil industry worldwide.
Therefore, contrary to some Marxist interpretations, capital and landed
property are not be perceived in terms of two stand-alone entities on the
verge of collision course in an imaginary mechanical conflict in

Capital and landed property in capitalism are
rather organically interconnected and, as such, the effect of their
mutuality and indivisible interaction can only be verified by the
empirical magnitude of "organic composition of capital" in the

This, however, is half of the story. "If you
throw an apple up in the air," a Persian adage cautions, "it
would turn a thousand and one times over." The short-run price of
oil, while subject to the gravitational force of the long-run price, need
not be continually identical with it, except by sheer accident. In other
words, short-run market prices are necessarily deviating from the long-run
price due to the dynamics of accumulation and the myriad contingent
factors some of which may be identified as follows: (1) the continued
increase in the US domestic and global oil demand, outpaced by the growth
of oil supply; (2) the tendency toward speculation and propensity for the
asset-holding activity in oil futures markets; (3) the sizeable decline in
the value of denominating currency, namely, the US dollar; (4) actual (or
anticipated) natural calamities and/or consequential political upheavals.

Yet, just as the movement of the Earth around the Sun cannot
be fully understood without a proper reference to the gravitational field
of the latter, the short-run price of oil cannot be understood without an
explicit recognition of the center of gravity of the long-run price. In
other words, aside from the circularity of one-sided reliance on the
short-run (that is, demand-and-supply) price, it would not be possible to
distinguish short-run market oscillations from the long-run structural
transformation, which disrupts the industry and tends to alter the
magnitude of the center of gravity - via periodic crises.

In a
fully planned economy, equalization of demand and supply can be achieved
by design. However, in a fully functioning market economy, demand and
supply are equalized by trial and error - more or less accidentally.
That's why we need to understand the theoretic and empirics of the center
of gravity (long-run price), prior to market fluctuations and daily market
prices. Hence the priority of production over circulation.

What is driving the price of oil today is a combination of all four
factors above. First, in the United States 4.5% of world population
consumes 25% of world oil production. China, with year-after-year
double-digit economic growth, is more than ever energy hungry. India is
not far behind and the rest of the developing economies do not cease their
growth either. Secondly, tendency toward speculation in the oil futures is
a recent phenomenon. This, in part, has to do with the prevailing
atmosphere of intrigue in the US financial sector, caused by the
sequential rupture of speculative bubbles - in the US real estate,
mortgage institutions, collateralized debt market, asset-backed commercial
paper market, and debt-obligation insurance market - domino style.

But, more importantly, an increase in the market price of oil is
due (thirdly) to the precipitous decline in the value of US dollar, which
serves as the denominating currency. Here, the decline in the value of US
dollar gives rise to two separate effects in the market price oil: a
direct effect, via the depreciating value of the denominating currency,
and an indirect effect, via a flight from the US dollar, as an asset, and
shift to oil (and other commodities) for speculative purposes. The
combined effect of these can be detected from the magnitude and volatility
of oil prices in the first and second quarters of 2008.

fourth factor is the drumbeat of war by the Bush-Cheney administration and
provocations to that effect by the Israeli government against Iran. This
would not only influence the price but indeed cause tremendous market
volatility in oil. For example, the statement by Israeli Deputy Prime
Minister Shaul Mofaz last May (2008) that an attack on Iran's nuclear
sites may be "unavoidable" led to an $11 increase in the price
of oil - the second largest single-day rise on record. This and other
events such as the replacement of Admiral William Fallon, commander of the
US CENTCOM in the Persian Gulf, with a careerist and apparently
neocon-friendly General David Petraeus, are not a kind of information that
could simply escape the mind of those who have set their eyes on the prize
in Wall Street.

Now, dynamics of the economy as a whole, and
their interaction with the sudden increase in the price of oil, mustn't be
treated as separate entities independent from one another. Moreover, the
oil sector and the magnitude of oil prices do not evolve in a vacuum by
themselves. The fact that the price of oil is increasing - beyond the
public expectation - is itself a clear manifestation of the turbulent
economy, not the other way around. It's the whole economy that is
intensely subject to internal restructuring - which is the classic
definition of crisis - and oil is only playing its part.

Consequently, it is not only utterly unwise to capitulate to supply-side
economics textbooks that refer to the oil price hikes as "supply
shock"; it is also disingenuous to behave like a neoliberal in
everything else but to speak of "self-sufficiency" (an obsession
with "domestic supply") in oil and energy, and to resort to
another after-the-fact and out-of-the-context shenanigan, namely, the
oil's "strategic" value.

Again, to appreciate
Frankfurt, invoking the notion of "self-sufficiency" in this
context is neither false nor true, but simply "bullshit" - the
corollary of which is the hoax of the "national security".
Unfortunately, despite our remarkable global interdependence, this
demagogic message has never ceased from being put on public display by
fearmongers in foreign policy and demagogues in the domestic arena, where
the American public is the first casualty.

The original
"shocks" of the 1970s were but a manifestation of (1)
decartelization and globalization of oil, including the decartelization of
the US crude oil sector, and (2) larger and more intricate internal
transformation, from the (hegemonic) Pax Americana to a worldwide
globalized economy and polity - minus American hegemony.

Besides, shocks are normally the attribute of external rather than
internal development. Therefore, it's terribly misleading to reverse the
direction of causality and claim that oil crises (in the 1970s) have been
responsible for the past US recessions. After all, thanks to the
globalization of oil that the "production price" of US oil is
now governing the "production price" of all oil globally.

We are now confronted with a food crisis, a fuel crisis, a housing
crisis, a credit crisis, and a banking crisis, - to name a handful. And,
if this is only a "mental recession", as the former Republican
Senator Phil Gramm (a one-time economics professor at Texas A&M
University) wants us to believe, we must have an awful lot of "mental
cases" on our hands at present in the US economy.

cruel irony in all this is that the same rightwing ideologues who bashed
the government support-system, smashed the public safety-net and cursed
public "handouts" for generations - all but in the name of
"free enterprise" and "laissez-faire" - are now
desperately crying for government handouts and public bailouts. Since the
beginning of this summer, well over $1 trillion have been transferred from
the public coffers to pockets of private banks, insurance companies, and
mortgage institutions that recklessly - and, in some cases, hand-in-glove
with public officials - made a decision to take incalculable risks in
order to earn untold amounts of profit.

Here "greed is
good", as always has been, especially when the government comes to
the rescue. The current handout is the largest transfer of wealth from
Main Street to Wall Street since the Great Depression. And, I fear, the
end is not yet in sight. The short list includes: Bear Stearns ($30
billion), Fannie Mae and Freddie Mac ($200 billion), AIG ($85 billion),
and, as of this week a massive non-specific rescue package for $700
billion. Incidentally, this is the same "bazooka" that the
Secretary of Treasury Henry Paulson had promised (to the US Congress) to


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