Saudis are Necessarily in Position of Price-Setter

Published November 16, 2007 in the Financial Times

From Mr Warren Mosler.

Sir, Adrian Binks’ letter “Oil price conspiracy theories get in the way of facts”(November 14) is precisely the response indicated in my letter (November 12); in this case from an energy information service. While Mr Binks’ 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 “market” 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 Binks’ statement that “the 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 being”, is indicative that President Vladimir Putin is well aware that Russia is indeed a “price-setter”, and I suggest that it is an error to underestimate his progress in this direction.

To address Mr Binks’ conclusion: this is not a “conspiracy theory” and not precisely a “price-setting cartel”. It is, rather, a point of logic describing a case of “imperfect competition” where (at least in the short run) a given supplier’s output is sufficiently large and flexible, and demand sufficiently constant, that the supplier is necessarily in the position of “price-setter”.

Warren Mosler,
Valance & Co,
St Croix,
USVI 00820

Copyright The Financial Times Limited 2007