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Oil prices again: question for the OTF economists

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    Oil prices again: question for the OTF economists

    OK, so Gordon Brown is sounding off about OPEC now, telling them it's outrageous that they're thinking of cutting production so as to bump prices up by means of the supply/demand curve effect at a time of incipient global recession.

    It's pretty obvious why he'd say that. Also pretty obvious why OPEC might want to ignore him.

    I'm interested, though, in the economic strategy considerations for an oil-exporting nation. Seems to me:

    - other things being equal, restricting supply to maximise price now makes sense for them

    - there's a slightly offsetting point that if high prices kill off their industrial customers, that reduces demand which depresses prices as well as volumes, leading to a lower rate of revenue flow for oil exporters

    - but, and here's the point that I'm surprised people don't give more weight to, surely it's in an oil-exporter's interests to reduce its rate of oil-exporting (subject only to having enough revenue to meet its current needs and any infrastructure spend it thinks worthwhile), REGARDLESS of whether or not other oil-exporters can be persuaded to join in in cartel-like fashion and so bump up prices now. My point is that oil is finite and rapidly dwindling resource. by some point in the future, the exporters will have sold ALL their economically extactable oil reserves. It's not as if they can somehow manage to sell more in TOTAL by selling more NOW. Surely it makes sense for them to push as much of the sales back to future years/decades when the shortages are more acute and prices therefore far higher than now? And it's not as if biggest oil exporters (Gulf region) are exactly strapped for cash. So why aren't they tightening the taps more?

    Incidentally, it strikes me that would help the west as higher prices now would make alternative energy R&D more profitable and hence more active and so lessen the eventual shock for which we are so ill-prepared.

    #2
    Oil prices again: question for the OTF economists

    A) The pump more at low prices v. pump less at high prices decision all depends on the elasticity of demand. And that's a tricky thing to measure, especially when (as in this case) part of the elasticity has to do with how fast technology will adapt and create substitutes for your product (most of the response to the oil crisis of the 70s, for instance, was increasing energy-efficiency in manufacturing).

    B) Different oil-producing countries have genuinely different interests here based on their ability to increase production, the extent of their reserves, and what kind of domestic commitments they have. Iran and Venezuela are all in favour of short-term revenue maximaization because their governments' stability is based on handing out tremendously large domestic subsidies and they would be in deep shit if the tap were turned off. The same is true of Saudi and the UAE, of course, but their current revenues run so far ahead of current subsidy requirements that they are more relaxed about production costs.

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      #3
      Oil prices again: question for the OTF economists

      As well, a lot of OPEC governments haven't been acting in the best long-term interest of their countries; it's mostly about the interest of their regimes. Saudi Arabia's royal clan is mostly concerned about its regime stability, which lies in good part in satisfying its protector, the US. It has kept the tap wide open for decades back when oil was undervalued, propped up the dollar by imposing it as the currency for oil trade, reinvested a lot of its revenues in US capital markets and in extremely exensive American weapon systems they don't really need. It's funny how the Saudis are usually portrayed as evil ungrates in the States when in fact they have been bending over backwards for decades to provide Americans with the lifestyle they have come to love.

      Dubai is the first visionary government in the area, they are the only country from that region (other than Israel) that has actually exploited the West and the outside world as opposed to the other way around, they are like the Singapore of the region.

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