Wednesday, May 28, 2008

It's a Cartel That Causes Oil Prices to Rise

On Human (‘leading the conservative movement since 1944’ Gustavo Coronel writes on ‘Oil Panic on the Rise’:

Somebody seems to have cut Adam Smith’s invisible hand, at least in what pertains to the market dynamics of the international oil industry. In the past the price of oil in the world markets has followed rather closely the ups and downs of supply and demand. As demand exceeded supply prices rose, national economies in the developed world slowed down, oil demand fell and this, in turn, produced a drop in the price of the product. This “thermostat” effect worked rather well during the oil crises of the 1970’s but it does not seem to be working well today.”

‘Somebody’ – who?, what?, when?, how?

I don’t recollect anything about invisible hands when Adam Smith explains how market and natural prices interact under changing conditions of supply and effectual demand in Book I of Wealth Of Nations (Chapters V, VI and VII).

In fact, Adam Smith was quite clear about how markets work and so are those who read his book –it’s those who have never read his book who invoke the mysterious invisible hand at any opportunity like automatons just to get name recognition to what they write.

However, it seems to me that in Gustav Coronel’s case (clearly a brave man who has stood up to the dictator, Hugo Chavez, who ‘designated’ him ‘as an "enemy" of the Chavez regime’, a designation I am sure he wears with pride, and for which libertarians salute him) in his article on the ‘mystery’ of the perpetual rise in oil prices he does not name the reason: oil prices are determined by a producers’ cartel, many of which are hostile to the USA and other western powers.

In the simplistic theory of cartels, as taught in modern classrooms, they are inherently unstable, and in time the business passes back to competition, after which the class moves onto something else.

National governments tend to legislate to break up cartels. That isn’t happening in the oil business for political reasons, not least that the component parts of OPEC, in line with such as Russia, their hostility (and in Saudi Arabia’s case its ambivalence) runs deep, and the cartel works because its members exercise self-discipline, for which they benefit manifestly.

Students of political economy understand this.


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