Published November 16, 2007 in the Financial Times
From Mr Warren Mosler.
Sir, Adrian BinksÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢ letter ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œOil price conspiracy theories get in the way of factsÃƒÂ¢Ã¢â€šÂ¬Ã‚Â(November 14) is precisely the response indicated in my letter (November 12); in this case from an energy information service. While Mr BinksÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢ statements are indeed factual, the institutional structure outlined, which the Saudis initiated, leaves more than sufficient room for the Saudis effectively to set prices and meet the demand at that price.
Note that their current production level of about 8.5m barrels per day is down about 2m bpd from just a few years ago. If they were simply producing based on capacity and selling the resulting output at ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œmarketÃƒÂ¢Ã¢â€šÂ¬Ã‚Â prices, their output would be higher and the price of crude much lower.
Furthermore, if they were not acting as swing producer, it would be far more difficult to organize general Opec production levels.
Regarding Russia, Mr BinksÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢ statement that ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œthe Kremlin proposed that an oil exchange be established at St Petersburg to set the price of Russian oil, although this has not yet come into beingÃƒÂ¢Ã¢â€šÂ¬Ã‚Â, is indicative that President Vladimir Putin is well aware that Russia is indeed a ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œprice-setterÃƒÂ¢Ã¢â€šÂ¬Ã‚Â, and I suggest that it is an error to underestimate his progress in this direction.
To address Mr BinksÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢ conclusion: this is not a ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œconspiracy theoryÃƒÂ¢Ã¢â€šÂ¬Ã‚Â and not precisely a ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œprice-setting cartelÃƒÂ¢Ã¢â€šÂ¬Ã‚Â. It is, rather, a point of logic describing a case of ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œimperfect competitionÃƒÂ¢Ã¢â€šÂ¬Ã‚Â where (at least in the short run) a given supplierÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s output is sufficiently large and flexible, and demand sufficiently constant, that the supplier is necessarily in the position of ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œprice-setterÃƒÂ¢Ã¢â€šÂ¬Ã‚Â.
Valance & Co,
Copyright The Financial Times Limited 2007