[OPE] The IMF and the oil price, "going forward"

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Sun Jul 20 2008 - 14:45:23 EDT

The IMF's analysis is as follows:

"High oil prices along the entire futures price curve now partly reflect expectations that only sustained high prices will induce the massive investment required to satisfy demand going forward. In this environment, oil prices have been very sensitive to any news signaling risks of short-term supply disruptions, including those related to geopolitical risks. Financial conditions have temporarily added to upward pressure on prices of oil and other commodities. Some financial variables, notably exchange rates, affect prices of oil and other commodities through their impact on physical demand and supply of oil. In contrast, there is little evidence that the increasing investor interest in oil and other commodities as an asset class has affected price trends for oil and other commodities, although purely financial factors, including shifts in market sentiment, may have short-term price effects." http://www.imf.org/external/pubs/ft/weo/2008/update/02/index.htm#table

The implicit argument is that "sustained high prices" are justified because even higher oil profits are needed, to induce more capital investment in the oil industry and raise supply levels (they do not mention profits as such, or who gets them). So question is, how high do oil profits actually have to go? In reality, the Oil Majors have been making very large profits from the time of the mergers of the late 1980s and the 1990s, and if they and OPEC countries limit production capacity and supply vis-a-vis current inventories available for sale, this can indeed increase their profits. If output growth is capped, inventories available for delivery are reduced, the risk premium goes up, prices go up, and then profits go up. Historically speaking, more oil revenue does not in fact automatically imply proportionally more oil output for final sale, and that is precisely the problem.

In the IMF's quasi-Hegelian philosophy of markets, if prices go up, "there must be a good economic reason for it" because if there wasn't a good economic reason they would not go up. And if prices go down, there must be a good economic reason for why they go down, because otherwise they would not go down. So whether prices are low or high, there is always a economic good reason for it. What is rational is real, and what is real is rational, and in this way, all price movements, up or down, are self-justifying demonstrations of the rationality of the market. The only cases where this does not apply, are workers' wages and social benefits. There is no good economic reason if they increase - but that just shows you whose side they are on.

In the reified language of the IMF, it seems like prices become like little creatures, little souls with a life of their own, who whisper good advice into the ears of investors - for example: "I am going up now, you need to invest more" or "I sense a risk coming on, and now I am going down", or "I feel disrupted now, and therefore I am fluctuating". At one moment, demand and supply determine prices, at the next, prices determine demand and supply, and so we go round and round in a merry tautological circle - but when, as the IMF does recognize, there is "increasing investor interest in oil and other commodities" then, all of a sudden, this is said to have no effect on "price trends", only "short term price effects"  - yet, they don't cite any evidence or counter-evidence for this. If oil prices have increased tangentially since 2001, surely this is not a short-term trend. In historical reality, after the second oil shock of 1979-80 sparked by the Iranian revolution, it took SIX YEARS for prices to come down. Chaudhuri's question still stands: "What else than speculation could have DOUBLED the price of oil in one year?"`.


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