Page 3 of 4 Oil, war, lies and bulls**t'
By Cyrus Bina
regions, thus turning the emerging differential oil productivities into
differential oil rents - side by side with a competitive profit. As a
consequence, these differential oil rents are not only price-determined but are
themselves the effect of competition and competitive pricing of oil. And, by
implication, OPEC is not a "cartel" but simply a rent-collecting organization.
The orthodox view (and similarly the self-described heterodoxy), however, takes
its point of departure from the bygone cartelized era, before lumping OPEC and
the rest of today's globalized oil together into an eclectic conspiratorial
collage. The case in point is Paul Cummings who - not quite unlike Klare -
starts with John D Rockefeller's oil monopoly and decidedly ends up with a
cartel
and monopoly, without detecting a hint of circularity in his argument.
An implicit hint of control and conspiracy does also emanate from Michael
Hudson's view of oil (Counterpunch, June 2008). He explicitly attributes the
"the cause of soaring oil prices" to "the Iraq War [which was supposed to lower
them, not raise them] and to the contribution of US overseas military spending
to the balance-of-payment deficit, and hence to the plunging dollar on world
markets."
Here, the reader should notice a tendency of a doubletalk in this supposedly
heterodox verdict. For it would be a bit bizarre to attribute the cause of the
US invasion of Iraq to an increase and, at the same time, a decrease in the
price of oil.
In a similar methodological approach, Paul Davidson, the guru of post-Keynesian
economics, on the one hand speaks of "OPEC Cartel," and on the hand invokes the
Marshallian notion of "user cost" in order to demonstrate the cause of oil
price hikes in the summer of 2008. The so-called user cost is an axiomatic
construct that relates the present and future price of oil, given the expected
increase of the latter. However, by appealing to this (axiomatic) concept alone
- without an independent empirical examination - the question is moot.
Nevertheless, even if one accepts this proposed deduction, which is simply a
tautological construct, one needs to search for a deeper cause behind the
sudden facade of these expected increases in the price of oil. Davidson,
however, tends to blame OPEC, rather speculatively, without focusing on the
action of speculators - those who buy and sell oil short in Wall Street, by
churning the "paper barrels" for a quick profit.
Davidson discounts the fact that OPEC is seen more than ever worried about
speculation in futures markets and thus hopelessly seeking a way out of this
short-run instability that jeopardized its long-run revenue and future
differential oil rents. But, alas, for Davidson, OPEC's price-determined
differential oil rents are but "monopoly rents."
To recapitulate, the production of oil from the least productive oil region is
entitled to a competitive profit. This reflects a normal rate of return on
capital investments that, notwithstanding the risk and uncertainty, move rather
competitively in and out of the industry on a regular basis. By comparison, oil
production from more productive oil regions is entitled to a differential oil
rent, in addition to normal profit.
In this manner, the long-run price of oil is set by the US oil production price
(US regional oil cost, plus competitive profit), which in turn represents the
gravitational center of short-run fluctuations of oil prices worldwide.
This also has a considerable implication for the question of environment and
the issues that are hanging in the balance in the view of the popular but
fictitious desire for "self-sufficiency" in oil and energy in the United
States. That is why, so long as the production from least productive US
oilfields is to continue, the measly production from new explorations, such as
from the US Outer Continental Shelf and/or Alaska's National Wildlife Refuge
(more productive US oil provinces) would neither change the center of gravity
(the long-run price) nor markedly reduce the short-run price of oil in the US.
Again, this is not because of the alleged "oil monopoly" invoked by popular
wisdom, but because of the very fact that these differential oil rents are an
outcome of competition among the lesser- and more-productive oilfields; and
thus least-productive oilfields are merely entitled to competitive profit,
without rent.
Given my ample demonstration elsewhere, I also wish to point in passing that
absolute rent is undoubtedly not applicable to the oil industry, and that the
formation of differential rents are an outcome of successful movement of
capital (shown by a higher than average composition of capital) in and out of
the oil industry worldwide. Therefore, contrary to some Marxist
interpretations, capital and landed property are not be perceived in terms of
two stand-alone entities on the verge of collision course in an imaginary
mechanical conflict in accumulation.
Capital and landed property in capitalism are rather organically interconnected
and, as such, the effect of their mutuality and indivisible interaction can
only be verified by the empirical magnitude of "organic composition of capital"
in the industry.
This, however, is half of the story. "If you throw an apple up in the air," a
Persian adage cautions, "it would turn a thousand and one times over." The
short-run price of oil, while subject to the gravitational force of the
long-run price, need not be continually identical with it, except by sheer
accident. In other words, short-run market prices are necessarily deviating
from the long-run price due to the dynamics of accumulation and the myriad
contingent factors some of which may be identified as follows: (1) the
continued increase in the US domestic and global oil demand, outpaced by the
growth of oil supply; (2) the tendency toward speculation and propensity for
the asset-holding activity in oil futures markets; (3) the sizeable decline in
the value of denominating currency, namely, the US dollar; (4) actual (or
anticipated) natural calamities and/or consequential political upheavals.
Yet, just as the movement of the Earth around the Sun cannot be fully
understood without a proper reference to the gravitational field of the latter,
the short-run price of oil cannot be understood without an explicit recognition
of the center of gravity of the long-run price. In other words, aside from the
circularity of one-sided reliance on the short-run (that is, demand-and-supply)
price, it would not be possible to distinguish short-run market oscillations
from the long-run structural transformation, which disrupts the industry and
tends to alter the magnitude of the center of gravity - via periodic crises.
In a fully planned economy, equalization of demand and supply can be achieved
by design. However, in a fully functioning market economy, demand and supply
are equalized by trial and error - more or less accidentally. That's why we
need to understand the theoretic and empirics of the center of gravity
(long-run price), prior to market fluctuations and daily market prices. Hence
the priority of production over circulation.
What is driving the price of oil today is a combination of all four factors
above. First, in the United States 4.5% of world population consumes 25% of
world oil production. China, with year-after-year double-digit economic growth,
is more than ever energy hungry. India is not far behind and the rest of the
developing economies do not cease their growth either. Secondly, tendency
toward speculation in the oil futures is a recent phenomenon. This, in part,
has to do with the prevailing atmosphere of intrigue in the US financial
sector, caused by the sequential rupture of speculative bubbles - in the US
real estate, mortgage institutions, collateralized debt market, asset-backed
commercial paper market, and debt-obligation insurance market - domino style.
But, more importantly, an increase in the market price of oil is due (thirdly)
to the precipitous decline in the value of US dollar, which serves as the
denominating currency. Here, the decline in the value of US dollar gives rise
to two separate effects in the market price oil: a direct effect, via the
depreciating value of the denominating currency, and an indirect effect, via a
flight from the US dollar, as an asset, and shift to oil (and other
commodities) for speculative purposes. The combined effect of these can be
detected from the magnitude and volatility of oil prices in the first and
second quarters of 2008.
The fourth factor is the drumbeat of war by the Bush-Cheney administration and
provocations to that effect by the Israeli government against Iran. This would
not only influence the price but indeed cause tremendous market volatility in
oil. For example, the statement by Israeli Deputy Prime Minister Shaul Mofaz
last May (2008) that an attack on Iran's nuclear sites may be "unavoidable" led
to an $11 increase in the price of oil - the second largest single-day rise on
record. This and other events such as the replacement of Admiral William
Fallon, commander of the US CENTCOM in the Persian Gulf, with a careerist and
apparently neocon-friendly General David Petraeus, are not a kind of
information that could simply escape the mind of those who have set their eyes
on the prize in Wall Street.
Now, dynamics of the economy as a whole, and their interaction with the sudden
increase in the price of oil, mustn't be treated as separate entities
independent from one another. Moreover, the oil sector and the magnitude of oil
prices do not evolve in a vacuum by themselves. The fact that the price of oil
is increasing - beyond the public expectation - is itself a clear manifestation
of the turbulent economy, not the other way around. It's the whole economy that
is intensely subject to internal restructuring - which is the classic
definition of crisis - and oil is only playing its part.
Consequently, it is not only utterly unwise to capitulate to supply-side
economics textbooks that refer to the oil price hikes as "supply shock"; it is
also disingenuous to behave like a neoliberal in everything else but to speak
of "self-sufficiency" (an obsession with "domestic supply") in oil and energy,
and to resort to another after-the-fact and out-of-the-context shenanigan,
namely, the oil's "strategic" value.
Again, to appreciate Frankfurt, invoking the notion of "self-sufficiency" in
this context is neither false nor true, but simply "bullshit" - the corollary
of which is the hoax of the "national security". Unfortunately, despite our
remarkable global interdependence, this demagogic message has never ceased from
being put on public display by fearmongers in foreign policy and demagogues in
the domestic arena, where the American public is the first casualty.
The original "shocks" of the 1970s were but a manifestation of (1)
decartelization and globalization of oil, including the decartelization of the
US crude oil sector, and (2) larger and more intricate internal transformation,
from the (hegemonic) Pax Americana to a worldwide globalized economy and polity
- minus American hegemony.
Besides, shocks are normally the attribute of external rather than internal
development. Therefore, it's terribly misleading to reverse the direction of
causality and claim that oil crises (in the 1970s) have been responsible for
the past US recessions. After all, thanks to the globalization of oil that the
"production price" of US oil is now governing the "production price" of all oil
globally.
We are now confronted with a food crisis, a fuel crisis, a housing crisis, a
credit crisis, and a banking crisis, - to name a handful. And, if this is only
a "mental recession", as the former Republican Senator Phil Gramm (a one-time
economics professor at Texas A&M University) wants us to believe, we must
have an awful lot of "mental cases" on our hands at present in the US economy.
The cruel irony in all this is that the same rightwing ideologues who bashed
the government support-system, smashed the public safety-net and cursed public
"handouts" for generations - all but in the name of "free enterprise" and
"laissez-faire" - are now desperately crying for government handouts and public
bailouts. Since the beginning of this summer, well over $1 trillion have been
transferred from the public coffers to pockets of private banks, insurance
companies, and mortgage institutions that recklessly - and, in some cases,
hand-in-glove with public officials - made a decision to take incalculable
risks in order to earn untold amounts of profit.
Here "greed is good", as always has been, especially when the government comes
to the rescue. The current handout is the largest transfer of wealth from Main
Street to Wall Street since the Great Depression. And, I fear, the end is not
yet in sight. The short list includes: Bear Stearns ($30 billion), Fannie Mae
and Freddie Mac ($200 billion), AIG ($85 billion), and, as of this week a
massive non-specific rescue package for $700 billion. Incidentally, this is the
same "bazooka" that the Secretary of Treasury Henry Paulson had promised (to
the US Congress) to be
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