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Posted by warren mosler (208.49.176.241) on 10:58:32 11/12/07
Dear Sir,
Monopoly Pricing in the Oil Market
Dear Letters Editor,
As crude oil prices continue to rise, the media continues to assume
competitive market forces are behind the increase, including political
tensions, weather, supply disruptions, and demand pressures. Completely
overlooked, however, is the fact that the Saudis post their offered prices
for the oil they sell to their refiners, and let the quantity they deliver
vary with demand. It is a simple case of monopoly price setting. The Saudis
are acting as 'swing producer' and setting the world price.
As a point of logic, the Saudis have no choice but to set the price of oil.
At the margin, they are in fact the sole supplier of about 8.5 million
barrels of crude that the world currently needs from them every day. As all
economics students are taught, any sole supplier is necessarily a 'price
setter'. Of course, the Saudis boldly deny that they set prices. However,
they do say they do not sell in the spot markets, but that they do
(publicly) post their desired prices to the refiners who buy their oil.
The Saudis will continue as price setter until net world supply increases
sufficiently to cause Saudi sales to fall and production drop to
unsustainably low levels. This is what happened in the early 1980s and
persisted until the last several years when a decrease in net available
world supply again put the Saudis back in the driver's seat.
Additionally, President Putin seems to have gained control over pricing of
Russian oil, making him a world 'price setter' as well. This means that
either the Saudis OR the Russians can raise prices at will, and the rest of
the market automatically follow. The bottom line is that the price of oil
will rise to the higher of ANY price Russia or the Saudis desire, with no
relief unless there is a drop in net world demand that reduces the demand
for both Saudi and Russian output to unsustainably low levels.
Yours faithfully,
Warren Mosler Senior Associate Fellow Cambridge Centre for Economic and
Public Policy University of Cambridge Chairman Valance Co. 5000 Estate
Southgate Christiansted, St. Croix, USVI 00820
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