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 US > 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 their > 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 run. > 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 mentioned have in fact happened in this instance -- you seem to recognize this with the 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 determination. 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 body. In solidarity, Jerry
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