> Bina, Cyrus Oil, Japan, and globalization. (Industry Overview)
>Challenge v37, n3 (May-June, 1994):41 (8 pages).
>
>Today, contrary to previous historical stages, oil pricing is the
>outcome of global competition among the existing oil regions of the
>world. These oil regions exhibit cost structures of varying
>magnitudes; however, in competition, the leaseholders must obtain an
>average rate of profit in the long run in order to stay in business.
>Given the persistence of differential costs (turning to differential
>productivity) among the regions,any low-cost oil region would
>ordinarily show profit rates that are above the industry's average.
>In other words, the low-cost oil regions, in addition to average
>profit rate, would show additional profits that are commensurate
>with their own differential cost advantage.
>
>These excess profits belong to the distinct category of oil rent; as
>such, they can be appropriated by the lessor, the owner of oil-in-
>place. The size of the oil rents, therefore, is simply dependent
>upon the magnitude of differential productivity (by implication,
>differential profitability) of all competing oil regions globally.
>Hence, differential profits turn into differential oil rents; and
>all differential oil rents are price-determined. This universal rule
>applies equally to both OPEC and non-OPEC countries. This explains,
>for instance, why OPEC posted prices no longer remain insulated from
>the determining (and at times, undermining) impact of spot prices in
>the global oil market.
>
>The development of global spot (and futures) markets in the oil
>industry is indeed the consequence of: (1) the extent of
>globalization of the oil industry and, in turn, the profundity of
>the integration of the oil- producing nation-states within the
>global economy; (2) the critical importance of U.S. oil cost
>structure in setting the price of oil worldwide; (3) the tendential
>unification of existing oil regions under a unique pricing rule;(4)
>the replacement of the cartelized arrangements and administrative
>pricing by the inherently unsettled forces within the global oil
>market; and, byimplication, (5) the development of OPEC as a
>rent-collecting association, with no apparent immunity from the
>influence of market forces and constraining oil market fundamentals.
>
>The onset of the above post-cartelization obtained its origin from
>the oil crisis of the early 1970s, which, in turn,initiated the
>global restructuring of the entire oil industry. The consequence of
>all this was the emergence of worldwide competitive prices based on
>the costliest oil region (namely, U.S. domestic oil) and the
>formation of worldwide differential oil rents for the more
>productive oil regions of the world. Thus, contrary to the popular
>belief, it is not OPEC, but U.S. domestic oil which is critical in
>the pricing of oil worldwide. In the absence of the old cartelized
>arrangements, neither OPEC nor its undeclared "new member"--the
>United States behind Saudi Arabia--can any longer be effective by
>holding to the physical control of oil alone. The oil scenario is
>only the reminder of the golden age--a nostalgic plea that
>interjects the past into the uncertain future. The real U.S.
>incentive, however, can be explained in terms of the channeling of
>massive Saudi oil revenues toward the U.S. regional (Middle East) as
>well as global strategic objectives.
>
>The U.S.-Saudi relationship has long been following the course of
>NATO-in-reverse. In the case of NATO, the United States paid for the
>containment of the Soviets. Here, the U.S. containment of the Middle
>East (and elsewhere) has been shouldered by, among others, the late
>Shah of Iran in the 1970s and, invariably, by Saudi Arabia since the
>1970s. Thanks to the oil money, the costs to the Saudi government
>amounted to well over $200 billion in the 1980s alone. The money has
>been spent on numerous U.S. global adventures, in Africa,
>Afghanistan, Nicaragua, etc. Given the globalization of the oil
>industry, the reference to the "necessity" of direct access to
>Middle East oil cannot be substantiated by the economics of oil
>production. The real issue is simply access to money, that is at the
>disposal of the client regimes...
>
>_______________
>
>bina's seems to me the best theory of oil pricing available.
>However, it does seem that once oil prices had collapsed in the 80s,
>saudi attempts to maintain market share and meet revenue objectives
>led it to further increase supply; that increased supply in
>depressed conditions led to collapsing prices and created problems
>for high cost producers, including American ones whose economic woes
>led to defaults and banking panics. Remember that Bush I
>(unsuccessfully) requested the Sa'udis not to flood the market! At
>any rate, Bina may overly downplay the power of the Sa'udis on the
>oil market. But I certainly think he is generally right, and perhaps
>the most insightful analyst of the politics and economics of oil
>today. In my opinion the American left will be in a better position
>once it comes to value the opinion of a Bina or Shaikh as much as it
>pines for the dulcet (to some) tones of a deLong.