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An Update on OPEC's Strategy

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
April 6th, 2013

As I am increasingly pleased to point out, the words lies and misunderstandings are not unknown in my papers, although I in theory I try to refrain from using them in my books. But since my publisher will apparently be late in releasing my new energy economics textbook (2013), I might get another crack at my manuscript, and the expression 'misunderstandings' is certain to appear in that work, and perhaps something stronger.

Recently, in a burlesque-like seminar at Uppsala University, a gentleman from Stockholm and the kind of establishment referred to by George Orwell as 'a system of indoor welfare', provoked a discussion with my good self on the future availability of oil, and in that exchange he was supported by a local ‘scholar'. During that farce I once again realized two things: it has become virtually impossible to employ mainstream economic logic when discussing energy with half-educated professors from the Stockholm-Uppsala region, and just as frustrating, the work of the leading oil economist in the United States (U.S.) - Professor James Hamilton of the University of California - has been lost in the shuffle. By "shuffle" I mean the lies and misunderstandings distributed by a site that publishes a great deal of his important work, while at the same time believing that they are serving the cause of freedom and democracy by also putting into circulation every scrap of nonsense that is likely to find favour with their readers.

But that is the past. The present issue is an article about oil in the (London) Financial Times by the chief energy strategist of Citygroup, Mr Seth Kleinman (2013), Where energy matters are concerned, the musings of Citygoup gurus are best ignored, and the same can be said of the energy departures of at least one editor of the Financial Times , although that publication still employs several brilliant energy journalists.

In any case, Kleinman ends his fable by saying that "the change in fuel economy is enough to significantly cut the expected growth in global oil demand - and, of course, oil prices." By fuel economy he means the increased availability of natural gas derived from shale, which admittedly is a valuable resource, but definitely not as valuable as many know-nothings believe. Moreover, it has almost certainly happened - or for that matter is happening at the present time - that a number of individuals occupying noteworthy positions in certain financial institutions have taken great pains to make investors believe that properties containing shale gas and shale oil are more valuable than they actually are. This is mentioned but not elaborated on in my finance book (2001), although my students in both Sweden and Australia have discussed this matter in class.

I haven't thought a lot about the large reduction in oil demand spoken of by Mr Kleinman, and in fact I won't as long as I have access to the sights-and-sounds of wonderful summer Stockholm, but as for a serious decline in the price of oil, forget about it. As I told the hopeless professors trying to match wits with me in the bizarre seminar referred to above, OPEC gave the oil importing world a well-deserved lesson when the global macroeconomy slid into recession in 2008-2009, and the price of oil dropped to 32 dollars a barrel (= $32/b). The OPEC general staff assembled at OPEC's headquarters in marvellous Vienna, and with the global economy still in retreat, the oil price was soon raised to approximately $70/b by a decrease in OPEC output of a few million barrels. Incidentally, even many intelligent researchers in the financial communities of North America and Europe thought that the price of a barrel of oil would descend to the price of a barrel of coca-cola.

The talented Mr Kleinman, and the two pseudo-savants in the Uppsala seminar, should wake up if they are going to continue trying to impress friends, neighbours and students by making pronouncements on a subject whose intricacies are essentially a mystery to them. OPEC's strategy now - in case you aren't aware - is based on ensuring an income of at least a trillion dollars a year by judicious cuts in their supply of oil if necessary, and this behaviour will very likely receive some implicit assistance from the major oil firms, who for some strange reason prefer to sell oil for one-handred dollars a barrel instead of the price of a barrel of ‘soft drinks'.

Moreover, it is not just useful but sagacious to employ some results from Econ 101 at this point. At the height of the Libyan 'affair' 1.7 million barrels of oil was lost to world market, and that was enough to raise the price of oil by about 17 percent.' Simply knowing this AND NOTHING ELSE tells us more about the optimal strategy of OPEC than silly seminars featuring pretentious academic research that is totally without a trace of applicable economic theory.

REFERENCES

Banks, Ferdinand E. (2013). Energy and Economic Theory . Singapore, London and New York: World Scientific-

____. (2001). Global Finance and Financial Markets: A Modern Introduction. Singapore, London and New York: World Scientific.

Kleinman, Seth (2013). 'Oil demand is set to fall in the age of abundant natural gas'. Financial Times (April 1).

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
April 6th, 2013




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