[OPE-L:6165] patrick's reply to bina

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Tue Nov 06 2001 - 20:57:44 EST


i think patrick meant to send this stimulating reply to cyrus bina to the list. 
by the way,  i am reluctant to say that this extra profit that is appropriated 
by land or mine or field owner of even the worst land is *absolute* rent. In 
Marx's formulation, the source of absolute rent is the extra profit that is 
produced in agriculture due to its lower than average OCC. This does not seem 
to be a tenable explanation of rent on marginal oil fields.  The meanings of 
absolute rent are somthing that could be probed as well.  rb
_____________
Cyrus:

Thanks for your reply.

Again, I have no quarrels with your analysis of differential rent. Or, even 
what would happen to the least productive oilfields if there was a severe and 
sustained price reduction. I am however of how low the price would have to go 
push a substantial fraction of US wells out of existence. Remember, back in the 
1980s when the price hit $12.50 (or something like that) many of the US wells 
were capped. So, presumably, the price would have to decline quite 
substantially for it to have a dramatic effect on the US. I don't know.

But, this was not the main point of my posting. I'm much more interested in the 
issue of "Saudi sovereignty." The fact that rent is price determined - and I 
totally agree with you on this - does not mean that Saudi and other OPEC 
members have no influence on prices. An example.

p = k + r(K/Q)          k unit cost of marginal producer, K capital invested, Q 
output, r average rate of
                              profit, p unit price of oil

p = p(US)

 k(SA) + r(SA)*K(SA)/Q(SA)     Saudi cost structure

 k(SA) + r(SA)*K(SA)/Q(SA)  < p = k + r(K/Q)

So, with lower cost, r(SA) > r.

There is nothing however to constraint OPEC to set international prices = p. 
They can raise the price sufficiently so that even marginal producers are 
picking up some rent, say we have p(OPEC) > p.

Now, in your message are you saving that OPEC can't establish p(OPEC) because 
the US will not allow Saudi to do so or because market forces will not allow to 
do?

I guess in both instances, Saudi time horizons will not matter. But, if it is 
the former, let me repeat my earlier question.

How does this relate to Bin Laden's Pan-Islamic agenda? How is it that US oil 
companies are able to dominate the Saudis? I gather that other than religious 
issues, radical nationalists in Saudi are also
upset with US control. Please expand on this for me.

I'm not challenging you and Rakesh on this issue. Rather, I'm searching for 
enlightenment. I don't know enough about the politics/economics of Saudi to 
make the connection between radical nationalists and oil policy.

peace, patrick



the question of
time horizon (particularly by the Saudi Government which , at the moment has
no sovereignty) is irrelevent.  On the other hand, OPEC is a rent-collecting
entity.  Oil rent is, in Marxian sense, price-determined.  And whether one
OPEC member will have more or less oil in the future has no bearing on this
argument.

Finally, OPEC is not a cartel as the popular press calls it.



At 12:52 PM 11/6/01 -0600, you wrote:
Hi Patrick,

The first point you raised a bout oil firms and specific oil  fields (not
oil regions) is problematic.  1. The 'word' regions I used refers to
geological formations, which presumably covers the type of oilfields.  I am
not referring to 'nation' as such, but to the oilfields under its
jurisdiction.  2. As I have demonstrated in THE ECONOMICS OF THE OIL CRISIS
and elsewhere, a huge bulk of oil (significant portion of world oil supply)
is already coming from the US oilfields, in which  the oilfields in the
lower 48 states are the least productive in the world.  These fields
determine the 'governing' price oil in the world (as they also establish the
average size of capital in value terms).  Any drastic decline in the price
oil, therefore, will first have an adverse effect on these oil fields before
others.

Secondly, at the same time, and at this level of analysis, the question of
time horizon (particularly by the Saudi Government which , at the moment has
no sovereignty) is irrelevent.  On the other hand, OPEC is a rent-collecting
entity.  Oil rent is, in Marxian sense, price-determined.  And whether one
OPEC member will have more or less oil in the future has no bearing on this
argument.

Finally, OPEC is not a cartel as the popular press calls it.

Best,

Cyrus Bina



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