Re: WTO and OPEC

[paul davidson <pdavidson@xxxxxxx>]

At 04:06 PM 03/07/2000 , Henry wrote:

> I should have written that OPEC came into existence as an effective cartel in
> 1973.  I remember being in New York in 1973 where several diplomat
> acqaintances
> of mine from the Southern Hemisphere were very excited about the new OPEC and
> thought that coffee, banana and other commodities cartels can be patterned
> after
> OPEC.


But of course there were other commodity cartels at that time (usually
sponsored by producing country governments), e.g., the tin cartel, the
cocoa cartel, etc. The difference was that because of the US opening its
huge market for oil (ending oil import quotes which kept oil imports to 10
per cent of domestic consumption), the US provided a usual rent to OPEC
that was there for the picking.  There was no equivalent situation for the
other cartels.




> >
> > >The current oil price is an inventory problem rather than a long >term
> pricing
> > issue.  When Clinton threatens to release US strategic >reserves, OPEC
> signaled
> > its decision to increase production >immediately. Many economists think
> that
> > U$35 dollar oil in the >long run, instead the current US$20 price, is
> good for
> > the global >economy.  At any rate, oil is no longer is critical factor
> for the
> > US >economy which is incresingly less dependent on oil for growth.
> >
> > Unfortunately, I disagree with the last two sentences.
>
> The decreased dependence on oil is amply documented by the Fed Res.


Reduction in oil as a percentage of GDP is partly due, of course -- to the
relative fall in the price of oil via-a-vis other products in the 1990s.
When oil as a percentage of GDP increases sharply for the calendar year
2000 (compared to 1998) what will the Fed. say then? The proportion of oil
consumption to GNP (our income is probably more important for these
purposes of comparison than our GDP) is bound to rise significantly as the
200% OPEC price jump redistributes income from oil consumers to OPEc and
domestic oil producers (watch out Northeast -- Texas and Louisiana-- and
Alaska -- are on the comeback trail -- and with Bush in the WH in
2001....). Only if the oil price increases produces inflation via cost of
living adjustments (unlikely) etc-- will oil as a proportion of GNP not
rise significantly -- as the inflation reflects an attempt to redistribute
the income back again.
But of course if that occurs watch out world hear comes Alan the inflation
fighter who will not hesitate to create a global recession to fight
inflation -- just as his predecessor Paul Volker did in 1979-1981 to take
some of the demand side steam out of  OPEC's rent seeking ability

Although we have much less manufacturing in the US than in the 1970s -- we
still require significant quantities of petroleum -- not only for
transporting those foreign imports further from source to market than when
the products were produced domestically -- but for all the additional "new
technology" services (how many ergs of energy does it take to keep all
those computers and servers humming all day long 365 days a year?), for all
the additional leisure-recreational activities since 1970s (after all the
income elasticity of such activities is significantly larger than unity,


>  Greenspan
> has pointed that out many times.


Repeating a number from the past does not say anything about the future --
even if the repeater is the usually obtuse Alan  -- who seems determined
this year to bust the US asset bubble even if it means repeating the error
of the Bank of Japan in 1990.

Sorry if I don't genuflect on the alter of Alan


> > For me, this is like deja vu. In the 1970s, the rise in oil prices was
> defended
> > as good for the global economy -- for it forced people to conserve.  Many
> > orthodox economists invoked the Hotelling rule for depletable resources to
> > indicate that the oil price would be $100 per barrel (in 1970s dollars)
> by the
> > year 2000 , e.g. Bill Nordhaus of Yale in an important study often
> cited at the
> > time. This was often used in Congressional hearings to defend doing
> nothing---.
> > But the impact was global inflation and higher unemployment
> >
> > My study for Brookings tried to explain why this was simply bosh -- and
> lower
> > oil prices was good for economic growth.
> >
> > Redistributing some much off the global income so quickly lead to a
> > potential financial problem for oil consuming nations trying to finance
> their
> > global oil consumption (e.g., Brazil, Hungary,  etc.) In the absence of a
> > global central bank, the recycling of Petrodollars was invoked.  This
> lead to
> > huge increases in international indebtedness and when Volker raised
> interest
> > rates pushing LIBOR sky high -- the international debt crisis of the 1980s.
> > Brady bonds, etc are the remaining ghosts of this era which still can haunt
> > us.  --See ECUADOR.
> >
>
> There was solid evidence that the 70s recycling of Pretrodollars, which mostly
> ended up in the US anyway, contributed to US inflation.


Are you  really arguing for a quantity theory of Petrodollar money ?

> It essentially syphoned
> off additional global funds used to purchase higher priced oil for
> investment in
> US real estate which was the only sector the unsophiscated Arabia managers
> thought they knew enough to handle.


Then who made all those loans to Brazil,  Hungary, and other oil consuming
nations, if not Citibank -- using the deposits of OPEC??

>  They are now more sophisticated.  May be a
> new injection of new Pretodollar is what is needed to sustain the new economy.


I can see it now,  an Arab factory turning out gas guzzling autos financed
by Petrodollars --)  to assure increased demand for petroleum in the
future.  There certainly would be very little incentive to put Petrodollars
into energy conserving technology.

> How much? If it is the Brooklyn Bridge, I already bought it more than
> once. ;-).
> Seriously, would you agree that the issue is not the price level as much
> as price
> volitility.  For my own business, I can live with $10 oil, or $20 dollar
> oil or
> $30 or even $40 oil, but I have a hard time with price volatility.


No I do not agree.  The high price of oil -- represents a vast
redistribution of income that has an especially strong impact on the
poorest nations on the global as well as poorest segments of our domestic
population. And it goes to some of the most reprehensible and irresponsible
people and nations of the globe -- people like Saddam Hussein, and even our
political friends such as the Kuwaitis and Saudis. If you want to
redistribute income, I can think of more deserving people.

Even at $35, oil is still behind its pre-1973 price vis a vis the NASDAQ.

And how many shares of NASDAQ do the lowest 10% of our income distribution
have?

> >
> > The trouble with the theory of comparative advantage is that it is like
> Say's
> > Law -- only true in a classical economy -- or in a global economy  AT FULL
> > EMPLOYMENT.  The theory assumes-- among other things -- that both labor and
> > capital are not mobile across national boundaries.  When capital is
> very mobile
> > and labor is not,  the benefits from comparative advantage can (need not
> > always) quickly disappear, especially if the result is a lack
> > of full employment effective demand globally.
>
> I agree.  That is why I have serious reservations about China joining the WTO.


Well at least hear we have some agreement.


Paul