Re: OPEC & Oil Prices

["Gunnar Tomasson" <tomasson@xxxxxxxx>]

Paul:

Let me preface my comments below by mentioning that, when my old teacher
Gottfried Haberler invited me to lunch in Washingtgon in 1978 to discuss a
working note on certain theoretical points which I had sent to him at AEI,
his very first question was:  "Is profit part of income in your scheme?"

"No!", I replied - and Haberler raised some other points.

As we parted, Haberler mentioned some papers by Schumpeter which might be
helpful.  It was only when I read these that I understood the reason for his
question - in Schumpeter's "scheme", profit is NOT part of income.

The importance of the conceptual point at issue is high-lighted by the
"capital costs" aspect of OPEC Oil Production Costs in the early 1970s
addressed in the following:


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.
>

In the context of Schumpeter's - and my own - "circular-flow" view of
entrepreneurial market economies, it is immediately clear that, ABSENT NEW
CREDIT CREATION IN THE AMOUNT THEREOF, any PROFIT earned by OPEC through
absorption by the world economy of OPEC oil sold at a "mark-up over
full-costs-production costs" MUST be identically offest by LOSSES incurred
by non-OPEC producers on the sale of their output.

In other words, NET PROFIT is always and necessarily ZERO in the absence of
what, for sake of brevity, I have termed FINAL DEMAND INFLATION by means of
NEW CREDIT CREATION in one form or another.

The flip side of this ANALYTICAL proposition translated into Keynes'
analysis of the "banana economy" in 'Treatise on Money', where a
"successful" savings campaign would drive equilibrium employment and output
to zero.

In the General Theory, Keynes did NOT resolve the logical conundrum
involved - instead, he finessed it by making believe that, absent
entrepreneurial miscalculation, EXPECTED PROFITS could be anything other
than zero in the aggregate.

Now, of course, it will most likely be next to impossible to find an
economic theorist of mainstream-monetarist-PKT persuasion who could explain
what Schumpeter was talking about when he wrote in Preface to the 1934
English version of 'The Theory of Economic Development' as follows:

"I have not been able to convince myself, for example, that such questions
as the source of interest [on production credit - insert GT] are either
unimportant or uninteresting.  They could be made so, at all events, only by
the fault of the author."

And how does all this relate to the "capital-costs" aspect of OPEC Oil
Production Costs in the early 1970s?

Briefly, IF Aramco had cashed in and sold its oil-producing facilities in
Saudi Arabia to investors at a price that reflected the "mark-up over
full-costs-production costs" - or re-valued production assets carried on its
books - THEN the "mark-up" would  had disappeared overnight.

Yet nothing would have changed!

I conclude that SOMETHING is wrong with the conceptual apparatus of modern
economic theorists when a sea-change in world economic conditions can be
made to disappear by mere book-keeping tricks.

Gunnar