Cyrus Bina On Differential Oil Rents

From: OPE-L Administrator (ope-admin@ricardo.ecn.wfu.edu)
Date: Wed Apr 09 2003 - 20:10:33 EDT


-------- Original Message --------
Subject: On Differential Oil Rents
From: "Cyrus Bina" <binac@mrs.umn.edu>
Date: Wed, April 9, 2003 8:07 pm
To: "ope-l administrator" <ope-admin@ricardo.ecn.wfu.edu>

Dear Jerry,

Would you please post this on OPE-L.  Thanks.

Cyrus



On the Real Meaning of "No Blood for Oil" Slogan
Copyrights  2003 Cyrus Bina

All rights reserved





Cyrus Bina



Given the globalization of the oil sector since the mid-1970s, which led
to de-cartelization of oil, abandonment of administrative pricing (i.e.,
'posted prices,' etc.), and formation of global spot markets (and,
likewise, futures markets) in oil, what has become universally
significant is the formation of differential oil rents across the
industry within global competition.  In other words, the oil crisis of
1973-74 laid the cornerstone of the global restructuring of oil across
the world.  Moreover, what did the so-called mainstream economists,
which then carbon copied by the journalists across-the- board, refer to
as OPEC offensive and OPEC cartel, was indeed a tip of the iceberg of
competitive determination of differential oil rents that tied to
objective formation and proliferation of spot oil markets across the
globe.



The forces of globalization thus led to the competition of the oil
fields in the various geographical areas of world.  Let me pose some
hypothetical questions in order to put my theory of differential oil
rent in the context of global oil and, perhaps, current political crisis
in Iraq.  The cause of war is the loss of American hegemony, a claim
that was attached to the now defunct inter-state system of Pax Americana
(1946 - 1979?).  The post-war Pax America, among others, has
inadvertently led to further development of 'globalization,' a
historical force that culminated to its implosion and the loss of the
nation-state hegemony.  However, America, particularly since the fall of
Soviet Union, is trying to get the lost hegemony back.  Parenthetically,
I utilize the notion of hegemony put fort by its original author,
Antonio Gramsci (Prison Notebooks).



In other words, my reference to the power of hegemony is NOT
anachronistic, mechanical, and externally induced, such as war.  It is
not the same as the parlance that is often used in the conventional
International Relations literature.  From my standpoint, hegemony
(particularly, global hegemony), is organic, historically unified, and
internally endowed.  Therefore, speaking of 'military hegemony' as
opposed to 'political' and/or 'economic' hegemony is not only nonsense
but also clearly a contradiction in terms.



My theoretical points and their political and foreign policy
implications are referred to my Economics of the Oil crisis, St.
Martin's (1985); "Some Controversies in the Development of Rent Theory:
The Nature of Oil Rent," Capital & Class, No. 39 (Winter 1989); "The Law
of Rent and Property: Applied to the Oil Industry," American Journal of
Economics and Sociology, Vol. 51 (2), April 1992; "Global Oil and
Inviability of Pax Americana," Economic and Political Weekly, 27 (28),
July 11, 1992; "The Rhetoric of Oil, and the Dilemma of  War and
American Hegemony," Arab Studies Quarterly, Vol. 15 (3), Summer 1993;
"On Sand Castles and Sandcastle Conjectures: A Rejoinder," Arab Studies
Quarterly, Vol. 17 (1 &2), Winter/Spring 1995; "Oil, Japan and
Globalization," Challenge, Vol. 37 (3), May/June 1994.



  1.. Q: Why I don't use my theoretical framework (i.e., value and price
formation and determination of differential oil rents in the pre-'74
period) to analyze the development of the oil industry pre-1974?

A: I have already anticipated that there might be some who think that
the law of value should determine everything, even the things that are
administratively determined.  Yet, we know for the fact that Marx's
method (Grundrisse, Introduction) starts with the concrete and then goes
back in order to situate it within history in abstract manner.  This,
however, is a half of the solution.  We need to return to the concrete
again, from the abstract so constructed, in order to turn our concrete
into an "informed concrete." This is what is known as the dialectical
method.  The development oil industry in terms of the value theory is
the result of the evolution of oil sector through its three-stage
developments.  I have demonstrated that the oil industry (in the Middle
East) has gone through (1) the period of administrative pricing, (2) a
period of transition (1950-1973), and finally, beyond the oil crisis of
1973-74-the globalization period.  The law of value, therefore, applies
to the latter period only.  At the same time, due to its historical
evolution, oil industry had become global, at least, from the early 1920
on. Therefore, when the law value (leading to differential oil rent,
etc.) emerged in this industry since 1974, it emerged within a global
framework.





  2.. Q: Why don't I speak of 'absolute rent' in the oil industry?


A:  Within the framework of value theory absolute rent belongs to the
rent-producing sector whose 'organic composition of capital' is below
'average.' Given the fact that oil industry, as a whole, has
historically been heavily 'capita intensive,' speaking of 'absolute oil
rent' is irrelevant.  Those who allude to 'absolute' rent for the oil
industry are either confused Marxists or if they mean 'monopoly rent'
are neoclassical economists, in which case are plain wrong.


    3.   Q: Is my theory of differential oil rent parallel with
Ricardo's concept of 'marginal

of cultivation'? Or, my least productive oil producer must necessary
charge no rent?



A: Determination of the least productive land and Marx's criticism of
Ricardo (so far as the oil industry is concerned) does not pertain to
the notion of absolute rent.  It is rather due to (Marx's) recognition
of two types of differential rents (DRI and DRII).  DRI refers to the
differential quality of land, while the quality of capital remains the
same on all the existing lands under cultivation; DRII, on the other
hand, refers to different quality of capital, given the unchanged
quality of land.  For obvious reasons, both of these conditions are
normally intertwined in any
 real situation (i.e., beyond a controlled environment). Therefore
differential rents are the result of the admixture and dynamics of
these two types of differential rents.  Consequently, the least
productive land from Marx's standpoint is different from Ricardo's.
For it is possible to have marginal land in conjunction with higher
quality of capital in which case the output can be more productive than
when a better than marginal land are used with the least productive
capital.  Therefore, marginal land, in this case, may be entitled to
differential land rent.  Therefore, Ricardo's rent on the marginal land
is at best accidental, a special case.  Now, the objective of my theory
of differential oil rent has been to formulate the dynamics of both
types of differential rents in the presence of rising oil prices since
the oil crisis of 1973-74.  This theory then has been situated within
the formation of new oil value and prices in conjunction with the
globalization of industry as a whole since the crisis.  My theory of
oil rent successfully avoids the pitfall of Ricardo's concept of the
marginal producer.   Therefore, my differential oil rents can be
obtained in the so-called 'marginal' oilfields that are capitalized
heavily with high quality capital.  When in comes to oil rent,
therefore, I will take issue with those oil economists, political
scientist, journalists, and plain old populists who, to the detriment
of public, are harping on the ahistorical neoclassical concept of
monopoly and cartel.



As for the period prior to 1973, differential rents were
administratively determined and, as such, had no resemblance to the
differential productivity of oil reserves across the globe.  Moreover,
they were calculated  based upon the "posted price" of oil and
'base-point' pricing of oil at both the Gulf of Mexico and Persian Gulf.






Now let me engage in a simple exercise of the calculation of the value
of all Iraqi proven oil reserves in today's prices.  We know that the
proven oil reserves of some 110 billion barrels in Iraq.  Assuming the
steady production schedules of 2.5 million and 5 million barrel per day
respectively, in two scenarios, we may obtain the following results:



  a.. The above reserves, ceteris paribus, might be utilized within some
120 yeas if the production will be set at 2.5 million per day or [2.5
* 365 = 912.5] 912.5 millions of barrels annually OR such reserves
shall be exhausted in 60 year if the production schedule increased to
5 million of daily barrels, the equivalent of [5 * 365 = 1,825] 1,825
million of barrels annually; b.. Let's assume $20.00 per barrel for
the price oil (viz. the 1990s average market price) and about $10.00
for Persian Gulf oil differential oil rent (see Bina, The Economics of
the Oil crisis, 1985 for definition of oil rents); c.. Let's further
assume 8% as a non-inflationary discount rate for calculation of our
present values, a steady 3% for the rate of inflation and 3% per year
for the growth in the volume of the existing proven reserves due to
additional discoveries.


I.                 The calculations according to the first scenario (the
annual production of 912.5 million barrels in 120 years, with $10.00 of
differential oil rent per barrel) are as follows:



912,500,000 * 120 = 109, 500, 000,000 barrels

109, 500,000,000 * $10 = $1,095,000,000,000



Given 8% annual discount rate, 3% annual rate of inflation, and 3%
annual growth rate of the proven reserves, we obtain the following
result:



8% - 3% + 3% = 8% of overall discount rate applies;

Thus the Present Value of $1,095,000,000,000 at 8% for 120 years is:
$106,800,000


II.               The calculations according to second scenario (the
annual production of 1,825 million barrels in 60 years, with $10.00 of
differential oil rent per barrel) are as follows:



1,825,000,000 * 60 = 109,500,000,000 barrels

109,500,000,000 * $10 = $1,095,000,000,000



Given 8% annual discount rate, 3% annual rate of inflation, and 3%
annual growth rate of the proven oil reserves, we obtain the following
result:



8% - 3% + 3% = 8% of overall discount rate applies;

Thus, the Present Value of $1,095,000,000,000 at 8% for 60 years is:

$10,810,000,000





Hence, given these two scenarios, the price tag for this PRIZE cannot be
more than $11 billion.  Now, let's assume that the Iraqi oil reserves
are underestimated and, say, they are five times more than the reported
figures by OPEC.  Then, ceteris paribus, on can multiply the highest
figure of $11 billion by 5, thus obtaining a present value of $55
billion.  Let's further assume that our reasonable figure of $10 for
differential rent per barrel (obtained from the average oil price of $20
in the 1990s) will be doubled!! Again, we cannot find a figure
significantly more than $110 billion as the Iraqi oil price tag of $110
billion.  Isn't this a chum change, not to mention the incalculable
human cost of war, relatively to the anticipated and unanticipated cost
of what the Bush administration has already proposing for the
prosecution of war with Iraq and its subsequent period of occupation?



Let us further assume that the proceeds from differential oil rents in
Iraq will be obtained on the annual basis for 55 long years.  In other
words, we assume that Bush Administration and its future successors are
able to invent a pill that tranquilizes, not only the people of Iraq but
also the entire people of the world in order to steal the Iraqi oil
rents for 55 years, till 2058!  Therefore, we need to calculate the
summation of the present value of annuitize annual Iraqi oil rents for
55 years.  For the sake of argument, I use a much larger figure of 5
million daily barrels in conjunction with the above (very liberal!)
assumption as follows:



            5 million * 365 =  1,825,000,000 annual barrels,

            1,825,000,000 * $10 = $18,250,000,000,



The Present Value $18,250,000,000 annual payments, to be paid for 55
consecutive years is equal to $224,814,450,000 or nearly $225 billion.
Again, this order of magnitude does not seem to allow any progressive
individual to make oneself so unrealistically an advocate of commodity
fetishism by pronouncing the slogan of "No Blood for Oil."





In my judgment, therefore, the left has to think seriously about the
slogan of "No Blood for Oil."  Optimistically, this slogan refers to the
tip of the iceberg; realistically, it is misleading on the cause of the
war, this one and the previous one.  The cause of war is due to lose of
the U.S. hegemony and its historical impossibility of gaining it back
(see my "Rhetoric of Oil and the Dilemma of War and American Hegemony,"
Arab Studies Quarterly, Summer 1993, 15 (3), pp. 1-20; "Oil, Japan, and
Globalization," Challenge, May/June 1994, 37 (3), pp. 41-48; "On the
Sand Castles and Sand-Castle Conjectures: A Rejoinder," Arab Studies
Quarterly, Winter/Spring 1995, 17 (1&2), pp. 167-171; Globalization: The
Epochal Imperatives and Developmental Tendencies," in Political Economy
of Globalization, Gluwer Academic Press, 1997, pp. 41-58).  You may call
this Bina's impossibility theorem!!





Tuesday, April 9, 2003

Minnesota, USA





Cyrus Bina, Ph.D.

Professor of Economics and Management

University of Minnesota, Morris

Morris, MN 56267

Phone: (320) 589-6193

Fax: (320) 589-6117

E-mail: binac@mrs.umn.edu












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