Shoulda, Woulda, Coulda Kept the Price of Oil Higher

Brian Doherty | October 4, 2006

Renaissance man and strongman Hugo Chavez reveals his expertise in natural resource economics and declares that the price of a barrel of oil "should not fall below 60 dollars. That is a fair price."

November delivery crude oil did fall to $58.70 on the New York Mercantile Exchange, showing that Mr. Chavez might need to work on developing a more rigorous philsophical defense of how his "should" should interact with economic reality--or rather a world thirsty for more affordable oil can shout back to Chavez, "don't should on us!" Domestically, pump prices are now averaging $2.31 a gallon.

Comments

|10.4.06 @ 12:54PM|#

When asked what "What 'should' the price of oil not rise above?" - I'm sure he won't mention what a "fair" price is.

|10.4.06 @ 12:58PM|#

It should do whatever it likes.

I dumped my energy stocks two months ago. [Gloat]

|10.4.06 @ 12:59PM|#

He's not talking about the market price, he's talking about fairness. Duh.

If you didn't recognize that a statement about the "fair price" of something, about what it "should" cost, is not an economic analysis, then it is probably you who needs to brush up.

Brian Doherty's mom should't work in a peep show booth for $40/hour. Please tell me which chapter of my econ textbook I need to consult to change my mind.

|10.4.06 @ 1:11PM|#

"He's not talking about the market price, he's talking about fairness. Duh."

Wait a minute... Hugo Chavez gets to decide what's fair???
And you side with him?

That's not fair. It's supposed to be my turn to decide what's fair.

|10.4.06 @ 1:16PM|#

joe: What would be the "fair" price for Brian's mom to work at the peep show? And how would you know?

|10.4.06 @ 1:25PM|#

A seller arguing that the price he wants a buyer to pay is "fair" is about as persuasive as gratuitously mentioning an opposing debater's mother in an analogy.

|10.4.06 @ 1:33PM|#

If Mr Chavez wants to put a $60/ barrel price tag on Venezuelan oil. I aay, "Go ahead. Just don't plan on delivering much oil today."

|10.4.06 @ 1:39PM|#

I believe what he was actually trying to say was...

"Bloodthirty capitalists please continue to buy oil. My economy is highly backward and almost all of our revenue is derived from selling oil to you capitalist pigs. If prices or demand were to fall, my regime would be in serious trouble as I have liberally increased government spending the last few years when oil prices spiked.

A decrease in revenues, might presage a recession and perhaps another coup. So please continue to bid up oil prices and consume excessively, my future, and the future of my party depends on it..."

|10.4.06 @ 1:43PM|#

What does "fairness" mean? Fair to whom? Heck, wouldn't it be "fairer" to me for Hugo to give me the black stuff? I think there's a reason we let the market, more or less, set prices. 'Cause "fair" is in the eye of the beholder.

Honestly, the idea that the market is somehow hiding a predetermined "fair" pricing of any product is a little strange. I'm sure God could tell us, but he ain't talking. Hugo can certainly operate within his supply-manipulating cartel to try to drive the price up. Is that "fair"?

James Anderson Merritt|10.4.06 @ 1:46PM|#

About "fair": Even after inflation is factored into the mix, and even after recent losses, the price of a barrel of oil today still hovers around twice what it was six years ago, in mid-2000.

So, did the world supply go down by half? Did the world demand double? Did the price of extraction and/or transportation zoom up? Or some combination of the above?

I'd be extremely happy to be earning today twice my year-2000 salary, although I wouldn't be very happy to work twice as hard or twice as long as I did then. Even if I were working somewhat harder or longer now than in 2000, however, I would judge such a salary increase as going well beyond "fair" and extending into the "generous" range.

|10.4.06 @ 1:50PM|#

Slainte, Ron, mitch, Pro Lib,

I didn't say I agreed with Mr. Chavez. I said Jacob's assertion that he doesn't understand economics is a bad argument, because he wasn't making an economic statement, but a statement of values.

Now, the objections you raise to his values statement are all quite legitimate. Saying that he doesn't understand economics because he has this values-based belief is just so much libertarian ego-stroking.

Russ|10.4.06 @ 1:50PM|#

Peep shows?
Joe, it ain't 1918.

fyodor|10.4.06 @ 1:52PM|#

joe,

The only "fair" price is the one agreed to by both buyer and seller.

Maybe (maybe) Doherty misidentifies the category of stupidity Chavez's comment falls under, but it's still a stupid comment, loaded with unintended irony so thick I wouldn't know where to start...

|10.4.06 @ 1:55PM|#

Do you guys think that the recent drop in price of crude oil was basically driven by Chevron's announcment of new huge oil reserves in the gulf of Mexico?

I have a feeling that announcement was not driven only by market forces, but mostly for political reasons.

Also, Chaves and his government are free to do whatever they can to raise the price of crude oil, including coordinating with other oil producing companies that base thei entire economies on the price of oil.

|10.4.06 @ 1:59PM|#

Also, Chaves and his government are free to do whatever they can to raise the price of crude oil, including coordinating with other oil producing companies that base thei entire economies on the price of oil.

In other words, if you don't like the price they are selling for. Then, go buy it from someone else. There are plenty of other countries selling oil.

|10.4.06 @ 1:59PM|#

Just out of morbid curiosity, does anybody have a reasonably reliable estimate of production costs in Chavezland?

|10.4.06 @ 2:00PM|#

Fyodor: "The only 'fair' price is the one agreed to by both buyer and seller."

Bingo.

|10.4.06 @ 2:00PM|#

Well, since "fair price" as an economic term basically means what the market price would be if all information were available to all parties and all parties were making rational decisions, Chavez is making an economic statement.

If he is not attempting to use the term in such a fashion, the "fair price" of a barrel of oil should be about the cost of production in Venezuela. That is if he is using the everyday definition of fair. The majority of the oil price is just rent extraction.

|10.4.06 @ 2:02PM|#

Say, do you think Chavez would think it was a coup to get an American to join his cabinet? An American lawyer who once sort of worked at the White House? With all of that oil wealth and corruption in Venezuela, I figure a cabinet member there has got to pull in a few million a year. I think I'd make a good Minister of Education and Sports, for instance. Think Hugo would let me telecommute from Tampa? I could fly in once a quarter or so, maybe to catch a fútbol game or two.

|10.4.06 @ 2:18PM|#

Another possibility is that the management of the corporation, who are almost all holdovers from the old regime, and many of whom were supporters of the coup against Mr. Chavez, are working sabotage production as a weapon against him.

Damn if those guys on the left like to use the word "sabotage" a whole lot. It seems during the 1930's -1980's the old Soviets kept complaining about some reactionary forces "sabotaging" their latest five year plan. Every other week.

fyodor|10.4.06 @ 2:19PM|#

joe,

I would presume at first blush that the idea that price "fairness" can somehow be pegged to some arbitrary dollar amount would likely be as crippling to a comprehensive understanding of economics as a rejection of evolution would be to a like understanding of biology. But then, who knows, I suppose some people can "compartmentalize" or something...

|10.4.06 @ 2:20PM|#

Russ,

It's always 1918 to Yukon Joe Boyle.

;-)

(Google it).

|10.4.06 @ 2:30PM|#

fyodor,

"I would presume at first blush that the idea that price "fairness" can somehow be pegged to some arbitrary dollar amount would likely be as crippling to a comprehensive understanding of economics as..."

That would depend on the definition of "fairness." If you define it strictly according to the operation of markets, then you are correct, as the fair price would change as the market changes.

If you introduce other values into the definition - for example, the distinctly non-market principle that people working in a profitable modern industry deserve to earn enough to live a modern lifestyle - then saying that fairness requires a price floor is completely compatible with an understanding of economic principles.

A better evolution example would be to say that believing the Genesis account of creation contains divine truth is incompatible with an understanding of biology; in fact, they are in no way contradictory, they simply deal with different subjects.

|10.4.06 @ 2:36PM|#

Yukon Joe Boyle,

Then you'll like the poem, "Yukon Ho". Here's an excerpt:

The Yukon is the place for us!
That's where we want to live.
Up there we'll get to yell and cuss
And act real primitive.

I love that.

|10.4.06 @ 2:42PM|#

"Do you guys think that the recent drop in price of crude oil was basically driven by Chevron's announcment of new huge oil reserves in the gulf of Mexico?

I have a feeling that announcement was not driven only by market forces, but mostly for political reasons."

Your feeling is wrong, and parinoid. I worked for chevron in the Gulf of Mexico until this augest. It took years of planing and decision making to drill the 100 million dollar well (the jack 2) that discover the new play. The results were anounced when they were known, and the higly risky project was started as soon as the technology and the economics were acceptable, long before the republicains were in danger of loseing congress.

|10.4.06 @ 2:50PM|#

"to say that believing the Genesis account of creation contains divine truth is incompatible with an understanding of biology; in fact, they are in no way contradictory, they simply deal with different subjects."

scientific method = some shit someone made up? Mmmmkay.

|10.4.06 @ 3:08PM|#

"If you introduce other values into the definition - for example, the distinctly non-market principle that people working in a profitable modern industry deserve to earn enough to live a modern lifestyle - then saying that fairness requires a price floor is completely compatible with an understanding of economic principles."

Okay, how would what PDVSA charge for oil relate to this. If you have a duty to provide for your employees, does that mean I, as customer, have a duty to buy from you?

Besides, this is beside the point in this case. PDVSA is massively profitable. Chavez wants more money to pay to the shareholder, the Venezuelan state.

|10.4.06 @ 3:25PM|#

A seller arguing that the price he wants a buyer to pay is "fair" is about as persuasive as gratuitously mentioning an opposing debater's mother in an analogy.

Joe has a thing about the mothers of people he's arguing with, either bringing them up or insulting them. I don't ask.

|10.4.06 @ 3:25PM|#

joe defending Hugo Chavez? What a shocker...

reportero|10.4.06 @ 3:40PM|#

Venezuela is a one-trick pony: oil. The moment the price slides it's in trouble - or more specifically, Chavez can't wield as much influence, er, engage in as much mischief. To keep up his influence - and stature with the international left - expect to hear more anti-American nonsense. Anti-Americanism coming out of any Latin American leader's mouth is a sure sign of domestic trouble.

As for PDSVA, the company's best and brightest were fired several years back - so production has to be falling. The company also has a huge oil debt with Cuba.

|10.4.06 @ 4:00PM|#

About "fair": Even after inflation is factored into the mix, and even after recent losses, the price of a barrel of oil today still hovers around twice what it was six years ago, in mid-2000.

So, did the world supply go down by half? Did the world demand double? Did the price of extraction and/or transportation zoom up? Or some combination of the above?

A doubling of price does not necessarily require a doubling of demand, a halving of supply, or some combination of both. Depending on the shape of the supply and demand curves for oil, a small increase in demand could result in a doubling of price even if supply remained the same. To be clear, I don't know the actual shape of these curves, but there is no reason to suspect that they have slopes of 1.

|10.4.06 @ 4:08PM|#

By the way, I consider $40/hour a "fair" asking price for a peep show featuring Mr. Chavez, but only if he's covered in $60/gallon oil.

|10.4.06 @ 4:12PM|#

Er... that should read "$60/barrel, not $60/gallon," although that would be interesting too.

|10.4.06 @ 4:15PM|#

A seller arguing that the price he wants a buyer to pay is "fair" is about as persuasive as gratuitously mentioning an opposing debater's mother in an analogy.

Joe has a thing about the mothers of people he's arguing with, either bringing them up or insulting them. I don't ask.

Comment by: Eric the .5b at October 4, 2006 03:25 PM

---

joe defending Hugo Chavez? What a shocker...

Comment by: rob at October 4, 2006 03:25 PM

Two incredibly accurate observations posted simultaneously. Sometimes I love the internet.

lunchstealer|10.4.06 @ 4:25PM|#

Now, the objections you raise to his values statement are all quite legitimate. Saying that he doesn't understand economics because he has this values-based belief is just so much libertarian ego-stroking.

So joe, what would be the fair price for seeing that in a peep show?

fyodor|10.4.06 @ 4:43PM|#

joe,

In the book, Childhood's End, a character points out that science never disproved the existence of Mt. Olympus, but science's advance did lead people to drop such beliefs.

Similarly, it from learning about economics that I came to understand how silly the idea of a "fair price" was. But, as I already conceded, I suppose such incongruous ideas can conceivably be held simultaneously in particularly flexible minds.

|10.4.06 @ 5:29PM|#

"About "fair": Even after inflation is factored into the mix, and even after recent losses, the price of a barrel of oil today still hovers around twice what it was six years ago, in mid-2000.

So, did the world supply go down by half? Did the world demand double? Did the price of extraction and/or transportation zoom up? Or some combination of the above?

A doubling of price does not necessarily require a doubling of demand, a halving of supply, or some combination of both. Depending on the shape of the supply and demand curves for oil, a small increase in demand could result in a doubling of price even if supply remained the same. To be clear, I don't know the actual shape of these curves, but there is no reason to suspect that they have slopes of 1.
"

There's more going on in the price of oil than the supply and demand of oil. All oil contracts are conducted in USD. Over the past few years, USD has weakened vs. other currencies -- one Euro has appreciated from $0.85 to $1.25, about a 50% gain, over the same period.

So it's not that oil is more expensive per se, its that dollars don't go as far in international markets.

Paul|10.4.06 @ 5:48PM|#

If we are going to get into politicized mismanagement, let's not pretend that it is only leftist who would allow political considerations to take precedence over best management.

Joe, you've hit on something here. Only a leftist's right-hand man would equally mismanage things so poorly: a fascist. A pox on both their houses.

Timothy|10.4.06 @ 5:52PM|#

Dude, oil is made by Dinosaurs laboring embeded in the Earth's crust. The "fair price" is whatever or secretive, reptilian oil barrons decide upon. Chavez, being the chosen prophet of our masters, is simply speaking the truth.

Paul|10.4.06 @ 6:10PM|#

Oopsy! Chavez has jacked up his own domestic spending entirely based upon the recently inflated price of oil. The air is coming outta the baloon, and this is the first official sign of panic. More to come, to be sure.

wingnutx|10.4.06 @ 6:22PM|#

His girlfriend gave up her toe!

Paul|10.4.06 @ 7:00PM|#

Paul, "right" hand man, indeed.

Ah, you got it. I was afraid I had 'subtled' myself into a corner.

|10.5.06 @ 9:34AM|#

joe can spot the bad ideas of fascist control of the economy on the right, but his blinders are operating at 100% capacity when he looks to the left. Well, at least he's consistent.

|10.5.06 @ 12:04PM|#

Herman Daly on fair pricing...sorta

"in balance of payments accounting the export of depleted natural capital, whether petroleum or timber cut beyond sustainable yield, is entered in the current account, and thus treated entirely as income. This is an accounting error. Some portion of those nonsustainable exports should be treated as the sale of a capital asset, and entered on capital account. If this were properly done, some countries would see their apparent balance of trade surplus converted into a true deficit, one that is being financed by drawdown and transfer abroad of their stock of natural capital. Reclassifying transactions in a way that converts a country's balance of trade from a surplus to a deficit would trigger a whole different set of IMF recommendations and actions. This reform of balance of payments accounting should be the initial focus of the IMF's new interest in environmentally sustainable development. The World Bank should warmly encourage its sister institution to get busy on this-it does not come naturally to them.

#2. Tax labor and income less. and tax resource throughput more. In the past it has been customary for governments to subsidize resource throughput to stimulate growth. Thus energy, water, fertilizer, and even deforestation, are even now frequently subsidized. To its credit the World Bank has generally opposed these subsidies. But it is necessary to go beyond removal of explicit financial subsidies to the removal of implicit environmental subsidies as well. By "implicit environmental subsidies" I mean external costs to the community that are not charged to the commodities whose production generates them.

Economists have long advocated internalizing external costs either by calculating and charging Pigouvian taxes (taxes which when added to marginal private costs make them equal to marginal social costs), or by Coasian redefinition of property rights (such that values that used to be public property and not valued in markets, become private property whose values are protected by their new owners). These solutions are elegant in theory, but often quite difficult in practice. A blunter, but much more operational instrument would be simply to shift our tax base away from labor and income on to throughput. We have to raise public revenue somehow, and the present system is highly distortionary in that by taxing labor and income in the face of high unemployment in nearly all countries we are discouraging exactly what we want more of. The present signal to firms is to shed labor, and substitute more capital and resource throughput, to the extent feasible. It would be better to economize on throughput because of the high external costs of its associated depletion and pollution, and et the same time to use more labor because of the high social benefits associated with reducing unemployment. "

http://www.whirledbank.org/ourwords/daly.html