naked capitalism

Anonymous says:

Just a note: Wolf’s graph on non-OPEC supply growth forecasts vs. outturns is misleading.

In particular, it appears to have failed to take into account Angola and Ecuador joining OPEC, as well as the IEA’s methodology change in mid-2007. The result is that the graph artificially mis-states the difference between the forecasts and outturns.

The IEA’s Jan08 OMR discusses this in substantial detail on p.24.

chegewara says:

i can’t believe how little attention is given to the fact that the only sizeable countries in which oil consumption is growing are China, India, Saudi Arabia, Iran and Russia. and the only reason is that oil prices are subsidized. in fact, if you are a petrochem connected to sinopec in china and get your oil at $60-70bbl (which is the current subsidezed level) your insentive is to consume as much as you can and sell your output outside of china at prices implying $120bbl. this is money tranfer from the govts of these countries to people in the local oil industries. think about another example: emirates is now the cheapest airline to fly from europe to asia with a stop over in dubai. the reason is simple – no fuel surcharge. how come? they get all the oil from abu-dhabi at subsidized level. so everybody starts to fly emirates, their demand for oil goes through the roof. the game can’t continue forever and subsidies NEVER work. the day these governments can’t afford subsidies peak oil will be over.
and then think about it this way, as oil prices fall back to $60s, all the funny guys like chavez and maybe even saud royal family would be gone. then perhaps they would invest more into oil development in the countries where extracting oil is cheap, instead of investing in all these unsustainable projects like tar sands and super deep drilling.

Anonymous says:

badanov is correct that the gov’t prevents exploitation of some reserves–for example, the reserves in ANWR and the continental shelf. But even if we could begin production in ANWR and the continental shelf today (which we couldn’t, because we don’t have the rigs), the new production would have only a very short-term, modest effect on prices. We just won’t see that much oil flow from those places relative to world demand, and the decline rate in other production is getting so high, largely because we’ve already applied high tech to tap the world’s reserves so efficiently.

The filling of the Strategic Petroleum Reserve raises the price of a barrel of oil roughly $1-$1.50. They’re filling the SPR at the rate of 70,000 barrels per day. That’s 0.08% of worldwide daily production. As a general rule of thumb, the price rises 10-15% for every 1% of supply taken off the market, or every 1% of demand added to the market, all other things being equal. So 70,000 barrels per day would move the price about 1.2%. That comes to about $1.50 when the price of a barrel of oil is $125, or a few cents of the price of gasoline. This is the one single thing Bush has done right in his entire presidency–he’s right to get that reserve filled now while oil is still cheap.

Chegewara points out correctly that gov’ts in China and the Gulf subsidize gasoline prices for their people, and that this drives up world demand. But the U.S. subsidizes oil consumption for its people too, through hefty ethanol subsidies, and that’s keeping U.S. demand higher than it would otherwise be, while also raising food prices. Like Yves, I don’t expect any change in policy in any of these subsidizing countries–China has the savings to be able to afford it, the Gulf has the oil earnings to be able to afford it, and U.S. politicians could never face the public outcry.

Becker is wrong when he says that predictions of $200 a barrel are mere extrapolations rather than based on analysis. Predictions of $200 a barrel are based on a number of academic studies of price and short-term demand elasticity, combined with a realistic view of the production decline rate over the rest of this year and next year. We will definitely see increasing demand destruction, but it won’t be sufficient to keep up with this decline rate, because we are nowhere near achieving the rates of energy efficiency we need for the coming decline rate.

Posner is right–we should inaugurate high taxes on both oil and emissions, and for all the reasons he says, which are not single-mindedly geared toward “hurting our ‘enemies’”. We need to stop this transfer of wealth so that we have the wealth to invest in energy efficiency and alternative energy, or we will be in real trouble.

Moe Gamble

Anonymous says:

This is Moe Gamble again–one more thing. Macndub is correct that “oil intensity of GDP in the US is one-third what it was in 1980.” But this also means the easy gains in energy efficiency have already been exploited.

And a lot of the reason our GDP oil intensity is lower now is because so much of our economy has been riding on the back of China (with our energy use transferred to them, while we kept most of the profits) and a financial industry with very iffy prospects.

And I just don’t see any evidence that large amounts of reserves are being deliberately held in the ground as a form of investment. ANWR and the U.S. continental shelf are being held in the ground–true. But there’s no way that this is some kind of investment strategy to gain higher prices later. Since I’m certain that Bush and Cheney understand the oil situation, we may be holding back those reserves to have some supply later, but that would be for dealing with a serious energy crunch, not for higher profits!

Meanwhile, the rest of the world has been positively stupid about its extraction policies. Saudi Arabia, for example, has actually damaged some of its most important reservoirs in an attempt to maintain it’s role of swing producer and image of endless supply. Within the biz, the dominant view until the past year or so has been that OPEC would be able to crank it up and high prices were temporary, so everyone has been pumping like crazy to cash in on the high prices.

Dan says:

While we’re in the process of placing higher taxes on oil to “prevent the collapse our civilzation” and “to promote the develpolment of alternative fuels” a la Friedman and Posner, let’s also place a big, fat tax on AIDS, and maybe heart disease and cancer.

It’ll work like this: If you’re HIV positive,for example, then you need to start forking an AIDS tax so that a real cure can finally be established. The disincentive, coupled with a windfall tax will finally put these insidious diseases to rest.

Then…and this is the best part!!….we can teach countries in Africa to do the same. They can apply this simple disincentive-inventive taxation plan to end poverty, war and AIDS.

“Malaria got you down? The government of The Congo hereby annouces the imposition of $1.00 tax on all mosquito bites. An Inspector with a Skeeter Meter will be visiting each village weekly. Anyone who claims that a bite is just acne or a rash prosecuted for tax evasion.”.

Then, with money in hand, watch the government work its magic!

Do you really think a tax will help solve our energy woes? If so, do you think it’ll take $1.00 a gallon or $10.00? Or $20?

Why would you trust our government (or any government) with a solution…to anything?

Anonymous says:

I’m inclined to agree with Posner. $200 oil is going to get us farther in research and development on new technologies than any government subsidy ever has.

As for the Becker-Posner blog, its one of the best on the web. The two are dueling geniuses… each reaching to outsmart the other.

For the record, I’m an alum of the University of Chicago Graduate School of Business and Law School (JD/MBA)… so I’m biased.

chegewara says:

>>I don’t expect any change in policy in any of these subsidizing countries–China has the savings to be able to afford it, the Gulf has the oil earnings to be able to afford it, and U.S. politicians could never face the public outcry.< <

i disagree completely. at least one of the countries (India) is gradually falling out of equation, as there is only so much of oil bonds that indians can raise. chinese savings is a different story, but think about it in terms of having $1.5K per capita in a country without any wealthfare safety net. IMO China can only pay for all of the price fixing only as long as foreigners hype persists and they can get all the $ they want. Middle East is a disaster in the making. Public sector salaries and food handouts are up on a permanent basis. People don’t remember that as recently as 2003 Saudi Arabia was on precipice of fiscal disaster. i am missing the point of the comment on US subsidies of ethanol as i don’t think that has any global impact on >>oil< < prices.

finally, think about it in common sense terms – if you are given oil at half the global price, you will max out your consumption (petrochem, smuggling, absence of fuel surcharges etc) and you will continue increasing it until there is smth in the pipe. subsidies NEVER work. ultimately they lead to physical shortages (of which you have in spades in both China and India) and development of black markets. and if you think price controls work in US, ask Nixon.

john c. halasz says:

Arguably, at these high oil prices, a tax on barrels of oil, without discrimination as to foreign or domestic sourcing, since it’s basically one global market, would end up as a tax on the rents of virtually all conventional oil producers. The logic is fairly straight forward. An additional $10 added to the price of oil in the U.S. would initially raise the price and reduce demand. Other countries. especially those that subsidize the oil price might take up some of the slack and bid up the price, but such subsidies are costly to them, and the size of the U.S. demand is so large that it’s doubtful that the remaining global demand could take up the slack. SO the Saudis, the lowest cost/highest rent producer might decide to swallow $5 of the tax to maintain its market share and relative revenues. Russia, a higher cost producer, but still enjoying large rents, would be forced to slash its price accordingly to avoid losing relative market share, and so on through further price cuts down to the level of most of the tax. The large revenue windfall at the expense of oil producer rents could be used to cushion dislocations to the lower income strata of the population, but most of all could be used to finance development of alternative energy sources.