Re: OPEC & Oil Prices

[Paul Davidson <pdavidson@xxxxxxx>]

At 12:54 PM 03/11/2000 -0500, you wrote:

> It is not clear that cheap oil is in the US's national interest.  It
> unconstructively distorts the US economy.  In recent years of cheap oil,
> conservation measures have all been abandoned.  US consumers are buying 10
> cylinder SUVs that delivers only 8 miles per gallon, as well as
> air-conditioned
> convertibles. Even with 2 dollar gas, commuters face only a US$500 annual
> increase in their gas bills.  Vehicle prices have risen faster than gas
> price in
> recent decades.  Of course, the rest of the world outside of the US has been
> operating on $4 gas for a long time.


Henry, here you are repeating the old-misguided slogans of the 1970s where
many orthodox economists argued that OPEC was doing the world a great
service by raising the price of crude oil -- so that "we" profligate
consumers would stop wasting  a depletable resource.
"?  What do you mean.  As an expert witness in some antitrust cases filled
against ARAMCO (the oil company that produced oil in Saudi Arabia in the
1970s),  the plaintiff's lawyers were able to obtain confidential
information on each well in Saudi Arabia and the cost of production plus
estimates for still unexploited fields.  The public price of 10 cents per
barrel for crude was a generous overestimate of actual costs including
capital costs/.


So when Gunnar writes
":As best I can recall it, the study concluded (a) that then-current oil
prices, at some $2-3 per barrel, were excessive relative to production costs
of perhaps $1 per barrel in the major oil producing countries of the Middle
East,"  he is underestimating the mark-up over full-costs-production costs.

So what do you mean by "cheap" Henry?  And what do you mean by "excessively
low commodity prices"?  In fact, as I have written in several places (see
Bruce MacFarland's inquiry on the pktnet several months ago), When Drake's
well was discovered in Pennsylvania, the price of  whale oil (please note a
reproducible-i.e., non depletable resource), the primary source of energy
for lighting in those days, was $100 per barrel in 1972 dollars.  Think of
how much energy prices decreased in the century following Drake's discovery
-- and what it did to the whaling business!!

I can imagine someone  writing at the beginning of the 19th century,  as
Henry did 100 years later "

"It is an economic axiom that excessively low commodity pricing breeds abuse of
> that commodity.  This truth can be observed in water, air , petrochemicals and
> energy.  It holds true even for labor and capital.  Higher labor cost drives
> productivity growth.


Really Henry do you believe that if energy prices had stayed at $100
dollars a barrel (in 1972 dollars for the last half of the 19th century
and  through the 20th century we would have more productivity growth and
greater economic growth than we did experience?

Henry goes on to quote that Delphic oracle:

>  Greenspan: "Bad loans are made in good times."


What nonsense!! A more reasonable homily in my humble opinion is that "Most
loans made in good times systematically go bad because central bankers
believe in preemptive strikes:. Or as Keynes puts it [GT p. 323] "the
remedy for the boom is not a higher rate of interest but a lower rate of
interest!"


Paul
Paul Davidson
Holly Chair of Excellence in Political Economy
Editor, JOURNAL OF POST KEYNESIAN ECONOMICS [JPKE]
Economics Department -- 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
email: Pdavidson@xxxxxxx;   phone: (865)974-4221;    fax: (865) 974-4601
http://econ.bus.utk.edu/Davidson.html