We've seen it with attempts to prevent global warming from being accepted, and even more egregiously with Ignorant Denial. Now we are getting the "Evil OPEC is responsible for all the trouble". The paper has bad geology, bad economics, bad politics, bad use of facts and figures, deceptive interpretation, failure to consider alternate hypothesis suggested by the same data, and a systematic use of bald assertions based on the above errors that reaches to the level of bad faith, and therefore, suggests academic fraud and political deception lie at the heart of the paper, its editing, its acceptance and its editing.
"Belief in an oil weapon has shaped U.S. perceptions of security
threat since 1958."
This is incorrect. In the 1930's, when the US was the swing producer of oil, the US used oil as a weapon, and FDR deliberately targetted imperial Japan with it. World War II. In 1933, the US paid for oil concessions in Saudi Arabia. He should also look up Friedrich Schuler book which highlights Mexico's use of oil as a weapon after the 1938 siezure in his survey of Mexican diplomatic history from 1934-1940.
The US began pursuing oil security with a geo-political military end, at the very latest, with the 1953 Iran crisis, where Dulles and the Eisenhower administration leveraged the US into the Iranian oil markets.
In short, 1958 is an implausibly late date to set America's concern with oil as a weapon, given the document history of the US on both sides of oil as a weapon.
It is never a good idea to start a paper with a direct factual inaccuracy. One must also ask which peer reviewers were unfamiliar with the Iran crisis of the early 1950's and the Mexico oil seizure of the late 1930's, and the American use of an oil embargo in 1941 as a move to pressure the empire of Japan. One would think the last, at least, would be considered important. In fact, he will later mention it, in direct contradiction to his earlier assertion. Incoherence isn't a good strategy either.
"Although the weapon has failed to harm the
U.S. (ref. 1, pp. 89 -140) and oil is abundant not scarce (2-5), belief
in the weapon persists. lobby Congress for protection f rom imports (ref. 1, pp. 41- 68). To this end, they presented a non sequitur that recast abun- "
The citation is buried at the bottom without a name. The name is professor Adelman of MIT, who regularly publishes in hard right think tanks, and whose views this paper parrots as if they are established. Adelman has a well known honesty deficit. To quote his views from the linked paper:
According to "conventional wisdom," humanity's need for oil cannot be met and a gap will soon emerge between demand and supply. That gap will broaden as the economies of Europe, Japan, and several emerging nations grow and increase their energy needs. The United States is at the mercy of Middle Eastern exporters who can use the "oil weapon" to cripple the U.S. economy.
This was published in early 2004. It is remarkable how wrong Prof. Adelman's assertions have turned out to be in the wake of Katrina - where the reduction of slightly more than 1.1 mpbd of production pushed crude oil prices, adjusted for GDP deflator, within a whisper of their all time peaks, and adjusted for PPI, above the all time peaks. If Stern is relying on Adelman as his uncontested expert, then all I can say is "don't trade oil futures based on Stern's economic advice".
It is also a strawman. The correct "conventional wisdom" assertion is that the mechanized nations are consuming oil wastefully, that they have an economic dependency on oil, and that present economic trends mean that oil supply and demand will come to a new equilibrium, one with a much higher price of oil. This higher price of oil will deliver a shock to consumers, and, possibly, a fatal shock to the US Dollar as a currency, or to the flexibility of the US economy.
In short, we have already found out that this paper doesn't read history very well, and is an attempt to vaseline a far right wing strawman view into mainstream discourse. As such, it is suspect, because it bases its attack on a viewpoint which almost nobody actually holds.
Instead let me outline the peak oil thesis one more time for those who are both slow on the uptake and terminally dishonest like Adelman, and, appearantly, his academic groupie, Stern.
Peak oil states that finding oil is a statistical process, that extraction will find oil randomly over time, and begin extracting it. That the results of this stochastic search for oil create a linkage between oil bandwidth and total economically recoverable oil ("Estimate of Ultimately Recoverable Oil"). As the extraction point approaches the half way mark, bandwidth will plateau, and total aggregate production will begin to decline on the other side of the plateau, with the decline accelerating over time.
Leaving aside various codiciles, modifications and subsidiary arguments - Peak Oil also suggests that the quality of oil will also decline. That is, most likely oil to find first will also be the easiest to refine, with progressively lower grades found in progressively deeper oil fields.
Hubert King's mathematics has been confirmed over time: the number of large discoveries has dropped, and the cost and rate of new discoveries has been decreasing. In essence, fewer fields, fewer big fields, and lower quality of new reserves are all features of the current oil situation. These are facts. They are also ignored wholesale by Stern.
It is one thing to take on a perceived conventional wisdom - it is quite another to lie about that conventional wisdom, and even more another to fail to correctly state the most important competing hypothesis - namely that oil production is going to plateau long before absolute resource exhaustion occurs.
The first is intellectual dishonesty. The second is outright academic fraud.
By confusing peak oil's contention of production and reserve linkage, along with its assertion that "there isn't another Saudi Arabia, or we would have found it" - with what the monopoly rent of OPEC is and the fear of embargo, is bad scholarship. Peak oil indicates what oil companies are admitting by their own exploration plans - that there is no other place as worth looking for oil as near existing superfields in the Middle East, and that it is the monopoly over future, not present, production which is at economic issue.
It is far more accurate to state that "oil as a weapon" is far down the list of oil security concerns. Instead as a mechanism of specific compellence oil is a failure as a weapon. Instead embargos have shown the ability to shift the balance of pricing power. This balancing of pricing power is the focus of Stern's paper, and therefore his economic model of pricing, and what he calls "wealth transfer" in his Cato Institute Paradigm - is the central point of contention.
"The oil weapon appears in concept as early as 1935-1936 during
League of Nations deliberations over prospective sanctions against
This is incorrect and ahistorical. The acquisition of, and possible denial of oil as a weapon was contemplated by Churchill in 1923 in World in Crisis. The concern for oil security in the US can be dated from TR's legislation for oil conservation reserves, which would eventually be raided by private oil companies in what became the "Teapot Dome" scandal. Hence oil security and supply for national defense, specifically for naval use, dates 20 years before 1935.
"The first use of the oil weapon seems to have been in 1941 when
the U.S. imposed an embargo on Japan over its occupation of China"
Incorrect, as noted Mexico 1937 is the first use of oil as a means of compellence.
"The episode suggests that if an importer's supply routes are vulnerable or if a single exporter can deny most supply, the oil weapon has power."
This is in direct contradiction to the scholarship he is citing - the rejection of oil embargos as successful rests, not on ultimately superior outcome, but on the ability to compell a target to a specific end. Quoting from F. Alhajji:
"Few studies diverge from conventional wisdom to demonstrate that economic sanctions did indeed achieve their objectives in special circumstances.
As I indicated in the introduction, the literature is generally polarized regarding the ability of Arab countries to achieve political gains thorough the use of the "oil weapon." Consumer Nationalism/Producer Symbolism explains this polarization and sheds light on the failure and success of the oil weapon. This approach explains why the embargo failed to coerce the United States to change its political stand toward Israel. In addition, it explains why the Arab states used the oil weapon and why they may use it again. "
First note the direct contradiction of Adelman-Stern about conventional wisdom on oil weapons. The conventional wisdom in the discipline is that oil as a weapon does not work, and that absent very specific circumstances, including failure of the target to respond appropriately, it doesn't even dramatically improve pricing power for the attacking country.
Second, note that the issue of compellence in evaluating the oil weapon is essential. Success is deteremined not merely by net improvement in circumstance, but by achieving goals set before hand. To understand the difference, consider the example of Strategic Bombing. Galbraith's studies of post-war data showed that strategic bombing did little to effect production of key war supplies, or reduce the availability of key parts such as ball bearings. However, the destruction did have an effect on the ability of the allies to impose peace on Germany in World War II, because of the inability to resume "business as usual" - a net improvement in their post-war position. Evaluated one way, as a means of advancing a specific goal, strategic bombing was a failure, evaluated the other, a success.
The reason I bring this point up, is because Stern, while arguing that the oil weapon is a myth because it does not advance specific ends, is also, up front, arguing that OPEC as a cartel has gained a wealth transfer because of withholding supply. In otherwords he is saying that the oil weapon has been effective - it has, in his paradigm, extorted a large sum of wealth from developed nations.
Which is it? Given the incoherence of his historical reading - where he says that oil as a weapon dates from 1958, then pushes it back to 1941, still not early enough, but so be it - when what he really means is that 1958 represents a specific intervention by oil companies based on a specific argument that middle eastern countries could use the oil weapon - it would be easiest to write this off to a muddle author. But muddle is what he isn't, instead, he's deadly sure, and willing to use absolutes such as "wrong" over and over again in his statements.
This means that instead, the most likely alternative - given his outright lie about competing hypotheses and about conventional scholarly wisdom on oil weapons - is that he is engaging in deception. He wants, on one hand, to argue that we need not fear the oil weapon because oil is abundant, and on the other hand to construct a boogeyman that has robbed the United States and other nations of large sums of money. His clearly politically biased language:
In 1973, James Akins, soon to be Ambassador to Saudi Arabia,
grafted resource exhaustion fears to the older protectionist root-
stock. In ``The Oil Weapon: This Time the Wolf Is Here'' (13) he
offered a formulation of U.S. powerlessness that guides our Saudi
policy to this day.
And shortly there afterward, there was the Arab Oil Embargo, which quadrupled prices and created the very "wealth transfer" that Stern is going to argue for. Which is it? Is Stern wtless or not? Is the fear of oil embargo being used as leverage merely a protectionist/depletionist fantasy - in which case there would be no wealth transfer, since substitutes would be found - or is it a real effect that allows OPEC to "manage abundance"?
"If oil were scarce, the cost to recover it should rise over time. The
opposite has occurred. Since 1970, real Saudi recovery cost has
declined from $3.86 b (ref. 22, pp. 269 -301) to an 'all-inclusive'
$1.50 b (1999$) (11). More recent costs can be derived."
This is just about flat earth economics, and dead wrong. What is even more interesting is that Stern's advisor, who is pushing, one might even say pimping, this paper, knows this isn't the case, because he testified before congress about the importance of "adaptive management" of resources before Congress. One of the key tennets of active management is the difference between management and mere extraction.
This statement also confuses, deliberately, economic and physical scarcity. Something can be economically scarce, and physically abundant. What is the difference? Lionel Robbins, one of the key architects of synthesizing the marginal revolution into neo-classical economics, defined economics as the study of trade offs between scarce resources to produce the best desired ends given essentially unlimited desires. That is, something is scarce when there are opportunity costs in its employment which can be measured in their effect on price. However, physical scarcity is an absolute ratio of consumption and reserves. There is plenty of fresh water in the world, it just happens to be very far away from where most of the people are in the world. Given its absolute quantity, fresh water is absurdly abundant - however, it is often economically scarce, because obtaining it involves economic trade offs between desired location of activity and costs of obtaining water.
This difference is crucial to the argument, and his assertion that "absolute scarcity equals rising cost of extraction" is simply wrong. A series of counter examples are in order. In absolute terms, there is less aluminum to be mined now than in 1780. However the extraction cost of aluminum in 1780 was so high, that it was more valuable than most precious metals. It was only with the development of large scale electrical purification of bauxite that aluminum became cheap. Thus aluminum was absolutely more abundant in 1780 physically, but relatively more scarce. The cost of extraction of aluminum has plunged in real terms, even though there is less of it.
Another simple example of falling cost of extraction being correlated to absolute depletion is logging. It is cheaper to clear cut a forest than to selectively log and replant. However, after clear cutting, trees are far more scarce than before in absolute terms, and the more scarce they are in economic terms, the more likely they are to be clear cut.
In short, while Stern goes into a huge round about calculation of extraction costs in Saudi Arabia, he started with a factually and theoretically unsupportable assertion.
The correct assertion is that if a mineral is more scarce, the cost for discovery of new deposits should rise. Instead of production cost, the proper measure is proving cost and discovery frequency. This is the correct measure of absolute, rather than economic, scarcity, because production costs can go down when production goes into "harvest" mode - namely, when exploration is reduced or has had its expensive hit or miss period over. Large discoveries are growing less frequent and taking longer to prove.
"Turning from cost to price (p), if oil were scarce and its market
per fectly competitive, p should increase at no less than the rate of
return on all assets used in production (ref. 22, pp. 241-267, and ref.
Once again mainstreaming Adelman's right wing views by reference - the paper is virtually a Cliff Notes of Adelman, without anything other than a long discussion about how cheap oil production is in a region which has no competing industries, thus managing to ignore externalizations in cost, technology and lack of competition in the labor market of gulf states.
And also wrong, wrong, wrong, wrong, wrong as his next Adelman quotation (there are alot of them aren't there?)
"Failure of North American pr to rise indicates absence of scarcity
Not in the least, since, as he is going to argue, this is a non-competitive market. It indicates, instead that there is some other rent that is balancing the scarcity rent. A theory that occurs to neither Stern, nor Adelman, despite the fact they spend a huge amount of time talking about it: namely security rent. That is, the cost of the exercise of military fiat. Not priced in this paper, not priced in Adelman. This essentially means that the entire analysis is, and there is no other word for it, bullshit. Without accounting for a counterveiling scarcity, naturally oil will seem more abundant than it is, when in fact what is happening is that the regulation of oil - which Adelman goes into great detail about and Stern handwrings over constantly - is based on a scarcity rent which offsets the advantage of oil rents.
It is hard, when a rent is being talked about, to believe that the author didn't know it existed in good faith. Having said he was talking about "the oil weapon" fiat rent must, therefore, be something he is aware of.
Even if technology were not adding reser ves faster than they are
being consumed there seems little reason to expect scarcity rents
until development is more extensive. For example, only 17 of 80
Iraqi fields are in production (28)
This was Chalabi - convicted bank embezzler's - viewpoint. However, it points out the fundamental flaw in the Cato Institute paradigm, namely that rents rest on fiat. The cost of the rent is not the capital cost of production, which Adelman through his sockpuppet Stern is arguing, but the cost of maintaining fiat against those who would expropriate property rights.
This point is one, if Stern had an ounce of intellectual honesty in his history section, he would have seen immediately. Namely, that the fiat cost of controlling oil is a rent, one that is collected by the entity providing whatever degree of security is present, and this fiat rent acts as a counterweight on the production cost of the oil. Oil producers strip the rest of their economies bare - the "Dutch disease". The cost of oil production in Saudi Arabia - which Stern wants to use as the bench mark, is inapproriate to measure whether oil is scarce physically, and whether it is scarce economically. Instead it is the production cost globally. The correct marginal measure of scarcity is, of course, the marginal barrel of oil - what is the most expensive barrel of oil that is in production. This, not the bottom production price, represents the market cost of oil. Sure everyone would like to pay the price of the cheapest barrel of oil, but why should that producer sell it too you.
What this means is that Adelman, and Sock Puppet Stern, on one hand assume abundant oil - that will fall to the rock bottom price of production - and then use the fact that oil isn't at that price to prove the market isn't competitive, and then use this to prove that oil is abundant economically and physically. Circular reasoning to back up a fallacy of equivocation, in pursuit of a straw man argument in bad faith. That's hitting for the cycle of logical fallacies out of the right wing Project for a New American Science....
Oil rig distribution tells a similar stor y. Rigs are hired to drill new
wells that replace annual production, natural decline, and demand
growth. In 2003, cOPEC used 0.05 of total world rigs, yet these
replaced 0.35 of world production (or quantity, q2003). The rest of
the world required 0.95 of rigs to replace the remaining
0.65qworld2003, exceeding cOPEC effort b by an order of magnitude.
In Saudi Arabia, 0.01 of world rigs replaced 0.1qworld2003 (derived
from ref. 31), although most Saudi fields have been worked for
Well, not surprisingly, this is simply wrong. As the link to Norway shows, all this means is that Saudi Arabia has no need to increase reserves, and that oil is not hard to find there. This is expected from the distribution of oil - where oil is abundant physically, it is also easy to find, and therefore requires fewer wells.
Again Stern contradicts himself - he wants to argue that low Saudi production price indicates global abundance, and then tells us that the Saudis aren't exploring for oil as intensively. Which means, surprise, surprise, the cost of capital isn't going to be very high for them.
In short, what Stern is whining about is "why won't they sell us oil cheap?" The answer, of course, is that contrary to what Adelman and his sock puppet Stern are saying - oil isn't globally abundant physically, and the balance between oil rent and fiat rent has shifted decisively towards the Saudis and other oil producers.
The failure to even acknowledge this - even after talking about it endlessly - is made more interesting in that the rebalancing of fiat and oil rent was the key contribution of Thatcherism/Reaganomics. That is, after spouting the right wing line on oil prices, Adelman and his sockpuppet Stern fail to understand the economic arrangements which the most important right wing leaders of the last 40 years established.
Sockpuppet Stern is so busy mainstreaming Adelman, in short, that he misses Reagan in his discussion on rents, and proudly cites one of Adelman's worst predictions: namely that Saddam's oil rents would go up after 1991.
Fiat Rent, Capital acquisition of rent, Scarcity Rent
While Stern is very big on throwing around numbers, he is basically pulling them from his ass. He gets history wrong. He fails to analyze the fiat rent that he spends a great deal of time talking about. He bases the cost of a competitive market on something other than the marginal barrel of oil. In short the Adelman-Stern-Boland team manage to flunk history, logic, economics, petroleum geology and ethics in a single swath. While arguing that "the oil weapon hasn't hurt the US" he argues, on the other hand, that there has been a massive "wealth transfer", which he abbreviates wt. Unfortuntely, he's wtless.
It is just as applicable to say that the West extracted oil at very low costs from Saudi Arabia - far lower than the marginal cost - because of the lack of competition for labor within Saudi Arabia, and the lack of security that follows from not having sufficient technology to maintain a modern military. What makes his laughable guestimate of competitive cost of Saudi oil that he comes up with even more intellectually dishonest is his contemplation of Osama bin Laden's objectives for Saudi Arabia.
Let's go over what Adelman - since it is Adelman's work we are really dealing with here - should know from his own work, namely that political entities often interfere with price signals, but that these price signal interferences express themselves as other costs. Governments that regulate the cost of gasoline to keep it low, will pay more in other costs from the market distortions. That's why allowing prices to move to their market distributions in a capital competitive equilibrium is optimal. There is no such thing as a free lunch. Adelman-Stern however, procede, after genuflecting at the market, to use a distorted price - let me emphasize that they presume that it is a distorted price, and use that as the basis for the "wealth transfer".
The level of wealth transfer under the post 1973 oil regime is not the production cost of oil in Saudi Arabia - even assuming that the world marginal price was capable of substituting for their production - because Saudi Arabia is distorting their own internal economy. The correct price is the price that oil would be if Saudi Arabia were a market economy with open movement of capital, a floating currency and a low level of regulation. That is to say, if they were on the free market side of the Mundellian triangle, rather than on the mercantile side of constricted movement of capital, a fixed currency and high regulation of the economy.
That price, if the Kingdom's oil industry had to compete for workers, investment, regulatory favors, land and a host of other features, would be a great deal higher than even his "conservative" 10 dollars a barrel estimate. In short, in order to find out what the wealth transfer is - if it is even positive - would require a neo-classical general equilibrium model of an open Saudi Arabia.
In the first part I accuse one R. Stern of everything short of fraud in his paper on oil abundance. He gets his history wrong, he gets his description of competing hypotheses wrong, he gets his micro-, meso- and macro- economics wrong, he gets his oil geology wrong, he sock puppets a right wing scholar and crows over predictions that turned out to be wrong, he fails to account correctly for the effects of technology. He is incoherent, on one hand arguing that the "oil weapon" hasn't hurt the US, on the other hand arguing that it has been the basis for a massive "wealth transfer" because the Saudis aren't selling their oil at rock bottom prices.
And what is ironic about this incredible string of incorrect assertions is that they are based on a simplistic model which wouldn't pass muster under ordinary circumstances. If John J. Boland had applied the same level of scrutiny to his protege's paper that he did to the Army Corps of engineers ESSENCE model - he'd have trashed it as having no emprical basis for its micro-economic inputs, a crude modelling of elasticity, a failure to account for additional costs and a failure to correctly account for the costs of management. In short, if Boland had one ounce of intellectual honesty, he, not I, would be trashing this horrific shambling pile of right wing screaming points.
The second massive irony is that the paper, while shilling for the Cato Institute's well known view that oil is a "bottomless well" - and adding nothing other than some simple multiplication to the work of Adelman - misses the very point of Thatcherism-Reaganomics.
What was this basic alteration?
- As of the late 1970's early 1980's, oil supply is no longer "abundant" economically - that is, there are trade offs involved between competing uses.
- Given a condition of economic scarcity, that is a condition where there is more desire than demand, the market will most efficiently allocate the available supply between competing uses provided price is allowed to move freely to send signals between buyers and sellers.
- Therefore remove as many of the constraints to price movement as possible, and the market will both find new supplies, and restrict demand, based on price movements.
- The producers of oil have leverage through two kinds of rent: cost of production rent, that is oil is cheaper to extract from them, and scarcity rent, that is, it is impossible to substitute away from their production feasibly. However, producers of oil have to pay fiat rent: the cost of maintaining their, as in their regime's, control over the physical land and infrastructure, along with meso-economic arrangements that allow their shifting of the profits of capital to the rent of internal fiat. These two costs, not the absolute physical abundance of oil, determine the market price of oil.
- The West supplies security - therefore, increase the value add of the West's security providing, and allow no more economic growth than can be obtained by improvements in productivity.
- Since low nominal gasoline cost is a "voter rent" - that is, voters in the United States will end the political domination of a party that allows the increase of gasoline prices, maintain gas prices as low by keeping real wages flat through monetary policy.
- Deal with the flow of petrodollars, that is the excess of scarcity rent over security rent, by slashing marginal tax rates on rent of finances, so that the rich of the west are being taxed at a rate which balances the internal fiat rent of the Saudis.
This system was not devised entirely apriori - nor is it comprehensive, it requires conservation measures created in the waning days of Carter, it required the monetary stinginess of Volcker to deflect blame from Reagan, it required careful arbitraging of the difference between the USSR's actual weak condition, and its perception of strength, and numerous other political codiciles. But by and large it worked as policy regime because it reduced the complexities of oil - not energy - to a few simple numbers. Make sure that oil imports from OPEC are not significantly higher than oil exports, make sure real wages are flat, allow asset inflation. Policies can't be any smarter than the people who run them, and Carter's Administration had an economic policy engine which was smarter than the people he had available to run it.
The deeper failure of this paper is a troubling intellectual dishonesty in its production. What is required for the oil calculation is a comprehensive analytic approach to the components of Western technological and its consequent security rent since the crumbling of the Ottoman Empire, against the economic scarcity rent of oil - against the third leg of the triangle, which is the abundance of oil against land rent in the West.
It is this triangle that Stern - while he prattles about two legs of it - abjectly fails to address. Oil can be both scarce, and abundant. That is, within the utilizations of oil there can be many competing uses which have opportunity costs - and abundant against the substitutions available outside of petroleum. That is, there can be more desire to use petroleum than there is ability to pay the natural cost of maintaining the oil system, and oil can still be a great deal cheaper than any competing alternative.
Specifically this is the case with the rent of land.
The problem that Thatcherism-Reaganomics sets is that it limits the effectiveness of monetary policy to the extent that real oil prices are pressured downwards by fixing real wages. After all, fixing the price of oil creates a rigidity of currency internally, and keeping real wages flat creates a rigidity of currency internally. These taken together must either reduce capital flow mobility, or the effectiveness of monetary policy. Since capital mobility is essential for the market setting the alternate uses of petroleum, and for finding new petroleum supplies, and for creating capital in lower wage areas to pressure manufacturing prices down - much of the movement around Mundell's triangle must come from the reduction in freedom of monetary policy.
It should be noted that an economic problem isn't a flaw - every economic policy will have its understood problems to manage, whether a barter economy, a silver debt economy, a gold standard economy or any other political economy. It is however a problem. That problem can be summarized as follows. Oil is used for many purposes, most have substitutions that have costs not dependent directly on oil. However, one use, transportation, is based on the rent of land. This is Adam Smith's old "land rent for convenience" trade off.
Allowing asset inflation allows inflation of ground rents - since ground rents are based on a fraction of the liquidity of a local economy. The more the ground rents, the more pressure there is to substitute oil for ground rent. Oil may be scarce within the uses of oil, and therefore the target of constriction of supply by producers to gain pricing advantage over consumers, but it is abundant relative to the amount of economically useful land - which is determined by the entropy of transportation grids.
This dual nature of oil is the blunder that the Simonizers make: the equilibrium of the three rents - fiat rent, scarcity rent, land rent, is a three valued, not two valued, market. The "natural" price of oil will be at the point where people in developed nations have spent as much of their time in transit, and their blood in maintaining military fiat as they are willing to for the price of gasoline they are paying.
This means that as long as the West exports to Saudi Arabia and other oilarchies - that is nations which have limited stake holders in the oil flow, and a local abundance of oil - as much as they import, the price of oil will descend down to its real cost of production. This is not, as Stern argues, the nominal cost of pumping and moving the oil, but also the cost of keeping internal fiat over the Kingdom of Saudi Arabia, the Republic of Iran etc. This cost is much higher than the 10 dollars he "conservatively" estimates, only if by Conservative you mean a Rush Limbaugh dead end darwin denying framework. Instead observing the "Great Commodities Depression" we find that oil bottomed at 11 dollars a barrel. At this price most of OPEC was in a shambles politically, and even the Saudis were rushing to the table to bargain - leaving the Palestinians to end their intifada. Clearly the long term real cost of Saudi oil, that price where they can pay the bills to stay in power, is much higher than this number.
If Adelman and his sock puppet Stern were correct and "OPEC is the problem", then we would expect that the move from 11 to 66 dollars a barrel in 8 years - that is a 600% price increase - would have been from severe supply constriction by OPEC "managing" the market. Instead there has been little demonstrated ability of OPEC to either pump more oil, or restrain members from pumping oil. In fact, they are pumping at capacity, and can only restrain long term prices by not investing in exploration or new capacity. Indicators of well head quality indicate that they are, in fact, pumping at unsustainably high rates. Their other techniques for increasing oil prices are to generate geo-political uncertainty - that is reduce the value of the West's security rent - and to reduce stated reserves - that is make use of their own fiat rent. These effects have been consequences of, not drivers of, the increase in price.
Instead the correct villian of the piece is the same one as with the 1973 and 1979 oil shocks - incorrect fiscal and monetary policy from the United States. Pursuing expansionary monetary policy has created more activity, and therefore more oil demand, above the level of exports to the oil archies. This causes a weakening of the dollar against oil as we should expect. The second blunder is an incorrect allocation of resources in increasing the value of rents that the oil archs are willing to pay. In the case of Reagan, security rent. In the case of Clinton, who was a better Reaganite than Reagan was, it was creating a dollar shortage, and thus increasing the rent that needed to be paid on maintaining wealth - which is the other part of security rent. These both relied on the fiat rent that the United States could charge others.
Iraq was a ham handed attempt to increase the value of American fiat rent by extending American fiat. It was, in economic terms, an investment of approximately 1.5 trillion US dollars in attempting to increase the value of security rent. The alternative that the American public had in Albert Gore was to make investments in American financial fiat rent, and in reduction of the marginal cost of transportation by trading consumer utility - they don't call them "Sport Utility Vehicles" because we've suddenly gone to dirt roads.
It is therefore to the Fed, and not to OPEC's ability to utilize its scarcity rent by cartel that the price increases in oil should be looked to. The oil geology indicates not an absolute depletion of oil, but, instead, a continued degradation in quality of oil, a continued increase in the expense of finding marginal barrels of oil, and a plateauing of total productive capacity of oil. These create a bandwidth scarcity rent of oil, since the competing rent - land - isn't a flow, but a stock. That is, there is a fixed amount of land, and economic rent of land is based on capital acquisition of tranportation grids, while the cost of oil is the cost of barrels of oil produced, and used, at a given time.
In summary, Richard Stern been allowed to mainstream Cato Institute screaming points through a massive combination of academic fraud, intellectual failure and just plain old nasty straw maning of other theories. That this comes through a supposedly respectable organ of discourse indicates that there is a deep corruption of the intellectual system, and a complete failure of peer review to impose even modest standards of academic honesty.
His failure to understand the market for oil rent, technolgy-security rent and ground-vote rent has lead to an estimate competative oil prices which is laughable on its face, and not supported by an emprical survey of price history, but instead on the failure to account for externalization of costs. This failure rises to the level of bad faith, since the paper, repeatedly, mentions the costs - regulation and security - which are not accounted for.
His failure includes incoherence - his model requires that oil be both scarce - else the cartel could not function - and abundant - else prices could not be maintained at artificially low values in various markets against competing substitutions. Rather than facing this dual nature of oil as both scarce and abundant, and modelling the simultaneaity involved, as should be expected from a good general equilibrium model, he shouts down his own data by repeated assertion that oil is only abundant.
This string of failures is compounded by a massive pimping of the paper by Boland, the Washington Times and other organs of right wing mainstreaming of junk science and junk discourse, parallelling their attacks on global warming and evolutionary theory. It represents a clear and present danger to the integrity of the academic and scientific systems, and calls for immediate action to prevent the continued deterioration of a system that supports the current prosperity in the United States.
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