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The best sentence I read today
So there is a possibility that what has looked like peak oil to some observers (something I believe is coming), was actually GCC [Gulf Cooperation Council] countries investing by not extracting oil.
Here is more. In these models, once oil prices start falling, they can fall very fast indeed.
Posted by Tyler Cowen on March 21, 2008 at 04:23 PM in Economics | Permalink
Comments
I love the smell of opportunity cost in the morning.
Posted by: Rolo at Mar 21, 2008 5:22:11 PM
There's an assumption here that doesn't make sense. Does unilaterally cutting, or failing to grow, your contribution to the supply, drive prices up enough to consider it rewarding behavior for your country?
OPEC countries compete among each other for higher output quotas. Also, compliance among OPEC countries has historically been a tenuous thing. Financial pressures have driven members to exceed their OPEC quotas, and noncompliance has tended to cascade.
So, by degrading your supply standing among the OPEC nations, you open the door to losing part of your quota to a nation with a new supply finding, which means lost revenue in the future and no supply-driven cost benefits to offset it. The worst scenario is that you effectively apply supply-pressure only to have an opportunist state meet your cuts with increased output, increasing their net revenues and lowering yours. Even without losing part of your quota or suffering from noncompliance, supply-driven cost benefits will be enjoyed by all oil sellers, including those that have invested in new sources.
Posted by: Rimfax at Mar 21, 2008 6:20:18 PM
My big problem with the Krugman idea is that it rests upon the Saudis (and others) actually deliberately refusing to sell oil high and then deliberately follow that up by deliberately selling oil low.
It is pretty insulting to Arabs to think they can't think far enough ahead to realize how stupid that would be. Maybe Chavez is that dumb (he is after all a socialist) but the oil ministers in OPEC are quite astute.
The Saudis in particular aren't thrilled with the idea of substitution and thus are more likely to try to keep the price of oil stable at a level below where substitution kicks in hard. This means selling when the price is high and "saving oil" when the price is low, the exact opposite of what Krugman suggests they might do. Just because an equation is clever doesn't mean it is smart.
Posted by: happyjuggler0 at Mar 21, 2008 7:10:09 PM
As Yamani, Oil Minister of Saudi Arabia, said before making the prices fell to force the drop out of Cafe:the Stone Age did not finish because the lack of stones.
Venezuela had a debt of 4 b $ in 1974,Oil price 2 $ a barrell.It went to 12 $ a barrel, and debt went to 32b $at the same time.And it happened again when oil reached 40$ in 1979 after the iranian revolution.You can check " The paradox of plenty "by Terry Lynn Karl, for more about was is known as Efecto Venezuela or how to become poorer after a windfall profit.I know it first and i live there.
Of course is against every econonic common sense the fact that until now no one has break down the collusion and selling over quotas.As it happens in the 80 but for the radicals Lybia , Iran and Iraq. Only the war forced this two to break the pact.
Posted by: k at Mar 21, 2008 8:06:14 PM
What is it with economists and their non-standard graphs?! It's very simple: the independent variable goes on the horizontal axis, the dependent variable goes on the horizontal axis. Every other science in the world does it that way. Every time I look at an economist's graph, I spend longer mentally transforming the graph than I do actually comprehending the information it conveys.
Posted by: David Wright at Mar 21, 2008 9:01:05 PM
Is anyone surprised by this? It is what they have been saying for some time. A production ceiling (around 85m barrels worldwide) and a price floor (around $80). It doesn't make sense to produce more if you have no need of the cash and nothing worth investing it in. It doesn't make sense to keep producing if the price falls unless you really need the money. Peak oil by policy.
Posted by: Lord at Mar 21, 2008 10:12:36 PM
Krugman's multiple equilibria theory is intriguing, but my gut reaction is that the energy crisis of the 1970s (and energy abundance of the 1980s) had a lot to do with U.S. government policies. Nixon imposed wage and price controls before the OPEC embargo, if I'm not mistaken. And if one studies the never-ending permutation of layer upon layer of regulations during the 1970s--where each successive change tried to undo the unintended consequences of the prior one--I don't see how you can talk about the energy crisis without bringing this up. It would be like using multiple equilibria, rather than rent control, to explain the shortage of housing after World War II.
In any event, Krugman hasn't convinced me with that backward bending supply curve. That type of curve makes sense for someone selling hours of labor every week, but I think it's much less intuitive for selling oil from a finite pool. Has anyone read the Cremer and Salehi-Isfahani paper that Krugman cited? Do they show output restrictions make sense in a formal model, with multiple time periods and a demand function in each period?
Oh, for David Wright: The reason economists' price/quantity graphs are backwards is that Alfred Marshall thought that quantity was the independent variable, and that market prices adjusted to it. So that's why he drew the curves that way. Then, when economists later reversed the causality, they kept the graphs the same way because otherwise it would look odd to them. (I am 99% sure that this explanation is correct, but it's late and maybe I've got my Famous Dead Economists mixed up.)
Posted by: Bob Murphy at Mar 21, 2008 11:36:23 PM
Every graph is beautiful in its own way. I have no trouble reading them. :-P
Posted by: Jacob Oost at Mar 21, 2008 11:49:38 PM
I’m not sure I’m convinced. One big problem in the main premise of this piece is that it ignores the values of the sovereign wealth funds in GCC countries. These are enormous; Abu Dhabi's is reportedly more than $1trillion, and that's just one of the 7 United Arab Emirates.
Also: "'many GCC countries might have very small current account surpluses' within 5 year". Maybe, but they will have amounted such enormous surpluses until then that the second part of this argument (GCC ramping up production to offset falling prices) won't really hold. They would then not have to really increase production anymore and just dip into the tons of cash piled up from all those years of high oil prices, and prices would remain high.
The original piece papers over this, and the second piece seems to ignore it and build its argument on it.
Posted by: saifedean at Mar 22, 2008 2:04:25 AM
You must look for the hidden assumption. How much recoverable oil do the GCC countries actually have? Don't look at their published reserve data for an answer as the figures there make no sense - they keep growing with no new discoveries. Perhaps they are reducing their production because that is all they can do?
Posted by: Stuart at Mar 22, 2008 9:40:14 AM
A graph of supply that snakes around hides a judgment getting made about future prices. One is really adjusting current production for future supply and demand.
Posted by: Randall Parker at Mar 22, 2008 4:35:16 PM
