leverage (was Re: Bina on Iraq)

Michael Pollak mpollak at panix.com
Thu Mar 13 20:23:41 PST 2003


On Mon, 10 Mar 2003 s-t-t at juno.com wrote:


> I'm still grappling with this but, over the past two decades there
> haven't been any successful politically-inspired manipulations of the
> price of oil, have there?

There certainly seems to have been one at the end of the 90s. In 1998, oil prices were in the teens, having been low throughout the entire decade. OPEC initiated a series of cuts, and oil prices rose substantially even through the world economy slowed down considerably -- by 2000, oil prices were close to $30. All this was before war threats and Venuezuela.

Another one seems to have happened the other way ten years earlier. Kuwait churned out lots of oil in the late 80s supposedly in an effort to drive the price down and to drive Iraq to terms on their border dispute. (Boy, did that backfire.) It depends on how you make your calculations. Kuwait sold that oil for more than it costs. But the argument is that sine it was under no financial pressure, it would have been more profitable on a long term basis to bank that oil until the market was tighter.

There is also an argument to be made that the deeper patterns of the oil market last 20 to 30 years, so that looking at the last two decades misses the forest for the trees. The oil market really was tight in the early 70s for reasons that grew pretty directly out of the preceding decades of cheap oil: growth in demand and progressively less investment in supply. And once that happens, then countries that control 30% of the oil used can control the market. In a glut, they can't. (It's kind of the way power companies squeezed California. They can't do it all the time. But they can do it big time when they can. And that moment lasts longer since oil demand and supply take longer to change than electricity supply and demand) But since gluts naturally lead to tight markets, a situation will likely arise every two or three decades where they are in a theoretically similar position. Arguably they were in such a position at the end of the 90s. (Even if it had some artificial, i.e., political props, they were barriers at least as hard to move as those involved in bringing new supplied online.)

Of course, as with the California power crisis, such power presumes that governments with the power to compel will just stand by and watch.

Michael



More information about the lbo-talk mailing list