[Marxism] Zero-sum?

[bauerly@xxxxxxxx]

Read the following excerpt from the Oxford Institute of Energy Studies on the
role of commodity futures markets in setting the price of oil.

http://www.oxfordenergy.org/pdfs/WPM31.pdf

"It became clear by the mid-1980s that the OPEC-administered oil-pricing regime
was unlikely to survive these competitive pressures for long. OPEC?s, or more
precisely Saudi Arabia?s, attempts to defend the marker price would only result
in a dramatic reduction in its oil exports and loss of market share as other
producers could offer to sell their oil at a discount to the Arab light. As a
result of these pressures, OPEC saw its own market share in the world?s oil
production fall from 52% in 1973 to less than 30% in 1985 with Saudi Arabia?s
share being the most affected. In an attempt to restore the country?s market
share, Saudi Arabia adopted the netback pricing system in 1986 (Mabro, 1986).
The netback pricing system provided oil companies with a guaranteed refining
margin since it was based on a general formula in which the price of crude oil
was set equal to the ex post product realization minus refining and
transport costs. The netback pricing system resulted in the 1986 price collapse,
from $26 per barrel in 1985 to less than $10 per barrel in mid-1986. Out of the
1986 crisis, the current ?market-related? oil-pricing regime was born. The
adoption of the current market-related pricing system represented a new chapter
in the history of oil price determination since it resulted in the abandonment
of the administered oil pricing system that had dominated the oil market from
the 1950s until the mid-1980s.
The current market-related oil-pricing regime is based on formula pricing, in
which the price of a certain variety of crude oil is set as a differential to a
certain marker or reference price. The emergence and expansion of the market for
crude oil allowed the development of market-referencing pricing off spot crude
markers such as spot West Texas Intermediate (WTI) (initially Alaska North
Slope), dated Brent and Dubai. The declining liquidity of the reference crudes
has, however, raised doubts about their ability to generate a marker price that
accurately reflects the price at the margin of the physical barrel of oil.
First, it is often argued that thin and illiquid markets are more
susceptible to distortions and squeezes. Second, in such markets where actual
deals are infrequent and irregular, the number of price quotations for actual
transactions is quite small. But for crude oil to act as a reference or
benchmark, price quotations should be generated on a regular basis. For a
regular flow of price quotes and daily price assessments of reference crudes,
markets rely on oil price reporting agencies for price discovery.10
The declining liquidity of the physical base of the reference crude oil and the
narrowness of the spot market have caused many oil-exporting and oil-consuming
countries to look for an alternative market to derive the price of the reference
crude.
The alternative was found in the futures market. When formula pricing was first
used in the mid-1980s, the WTI and Brent futures contracts were in their
infancy. Since then, the futures market has grown to become not only a market
that allows producers and refiners to hedge their risks and speculators to take
positions, but is also at the heart of the current oil-pricing regime. Thus,
instead of using dated Brent as the basis of pricing crude exports to Europe,
several major oil-producing countries such as Saudi Arabia, Kuwait and Iran
rely on the IPE Brent Weighted Average (BWAVE). The shift to the futures market
has been justified by a number of factors. Unlike the spot market, the futures
market is highly liquid which makes it less vulnerable to distortions. Another
reason is that a futures price is determined by actual transactions
in the futures exchange and not on the basis of assessed prices by oil reporting
agencies. Furthermore, the timely availability of futures prices, which are
continuously updated and disseminated to the public, enhances price
transparency.
In brief, the oil pricing system witnessed major transformations in the last 50
years or so which saw the oil market shift from the administered oil pricing
system first governed by multinational oil companies and then governed by OPEC
to a marketrelated system in which oil was initially priced off the spot market
until the futures market assumed a greater role in price discovery. This had
important implications on the pricing power of OPEC, as will be explained in
the following section."


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