From: rakeshb@stanford.edu
Date: Sat Feb 22 2003 - 13:04:29 EST
Just to restate evidence against the idea that OPEC is a price-fixing cartel; I sent this post in December, 2001, I think. I quote here from a chapter "Oil: temporarily a special case" in Kunibert Raffer and Hans Singer's The Economic North South Divide: Six Decades of Unequal Development.(Elgar, 2001) They seem to reach the same conclusion here as Cyrus Bina regarding the dwindling pricing power of OPEC or Saudi Arabia in particular. Rakesh "When OPEC could not stop the gradual erosion of its market share it abandoned its policy of restricting supply, which led to the price collapse of 1986. This policy was mainly based on Saudi Arabia's willingness to be a 'swing producer', the country reducing its production substantially. Between 1980 and 1985, Saudi production declined by more than two thirds. It fell so low that associated gas production could no longer meet the kingdom's internal needs. Maintaining their idle capacities in a state of readiness caused considerable costs. In August 1985, Saudi Arabia linked prices to the spot market, and raised output to 5 million barrels per day in early 1986. The emerging new pricing system linked transaction prices closely to prices, established in organized trading markets. This change highlighted OPEC's new situation. In the 1970s, Saudi Arabia Light served as the so called 'market crude,' the basis on which all oil prices were calculated. At the beginning of the 1980s, spot prices started to dominate official OPEC prices. Nowadays non OPEC crudes, such as Brent UK or West Texas intermediate (as traded at the New York Mercantile Exchange), are usually quoted as THE oil price. "UNCTAD (1999) describes the present situation: 'a new pricing system dominated by future markets has emerged. Under this system, traders set up key futures prices based mainly on expectations of market conditions. Transaction prices have become closely linked to prices established in the organized trading markets. The large influence and the functioning of futures trading have resulted in more transparency in the petroleum market, enabling not only consumers but also speculators to react to shifts in supply or demand more rapidly.' "The former direct link between changes in supply and price does not exist any longer." Then on the conditions in the oil market in 2000: "In spite of further increases of production, prices have not fallen. As prices are now determined on exchanges speculators may well be able to raise prices further while output expands, thus reducing the pricing power of producers, as OPEC (2000) pointed out. After the summer OPEC became more outspoken. After three agreements by OPEC members to raise output in 2000 and a total increase of 'no less than 3.3 mb/d, brining supply to the market will in excess of anticipated oil demands', crude prices had [not?] fallen noticeably over recent days. According to OPEC, the real reasons for market volatility were therefore refining botlenecks, 'speculation in the futures market, manipulation of the Brent market due to dwindling volumes of this crude,' and widening diffrentials between certain types of crudes. These are all elements 'about which OPEC can do little or nothing at all'. Naturally the approaching winter is one reason fuelling speculation. Should it be very cold, this would strongly affect demand for heating oil." Quoting rakeshb@Stanford.EDU: > OPEC is a price-fixing cartel? Evidence? George's most important > piece of evidence seems to be the assertion of a Republican > yahoo congressman probably aiming for the anti Arab popular > vote. Argument against counter-evidence? How much of tradeable > oil is under OPEC control? What is the nature of internal OPEC > relations? How are OPEC decisions made? How do the spot and > future markets affect or constrain OPEC choices? Or is the price of > oil simply determined by the arbitrary will of OPEC? Is OPEC > always an effective price-fixing cartel? If not, why not? > > OPEC collects differential rent, George says--but differential rent > is > not the product of monopoly power. The magnitude of differential > rent, whether I or II, is price-determined, that is, it is determined > in > and through competitive price formation, as Cyrus shows. > Differential rent is not a price-determining phenomenon; it is not > the product of the pricing power of monopolies. In short, two > claims are conflated--OPEC is a price-fixing cartel and OPEC > collects differential rent. The latter is true; the former not. It > may > well be true that the US would like to exercise indirect control over > > the disbursement of OPEC and Arab oil rent in particular in order > to make a (hopeless and thus truly reactionary bid) bid for > renewed hegemony. > > I also think by absolute rent, George does not mean absolute rent > in Marx's sense but rather in the sense of monopoly rent. > > I just don't find the underlying economic analysis persuasive; > moreover, I think the analysis based as it is on the myth of OPEC > as a price-fixing cartel comes close to supporting the anti Arab > demonology (close in structure to the old myths of the Elders of > Zion) which will be the backbone of popular support for the war, > such that it is. > > Yours, Rakesh
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