OPEC recently had a meeting and came to the conclusion that they were going to cut oil production by 1.2 million barrels a day. The reasoning for this is to stop the current price slide in crude oil. We are in a very volatile market and that can be seen through the price fluctuations in oil over the past several months. Oil hit $142 a barrel in June and is now around the high $50’s range. Changing policy to try to control prices allows insiders to manipulate and control market trends. But what I’m trying to say is that shouldn’t we allow for the markets to decide where the prices fall? This goes back to the French ideal of laissez- faire, or, without government intervention. The anti-government with economics idea in America came at a time when all of the Rockefellers were reaping huge profits and left the common public in turmoil. This is because the government used to implement policies and laws that would benefit them most, which was always by helping out large corporations. They had too much influence on the markets. Some analysts of the Great Depression believe that it was due to government intervention in the markets that sparked the flame. Their reasoning being that the gov. branch on economic policy, the Federal Reserve, increased the supply of money, to help with war debt. It was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and in capital goods. By the time the Fed was able to tighten things up in 1928, it was far too late and a depression was inevitable. Let me bring us up to date now. So that is one perspective on the history of how the Great Depression began. Well if you look at our current economic situation, are we so different? We have the war on Iraq, we have an inflation of money supply for the war and again for our current bailout, we had inflationary prices up to around October/November of last year, and everything has been dropping. (Watch this video on youtube youtube.com/watch?v=GFxZDTAXEhg to see how analysts view the Fed as the causation for our economic crisis) The Dow Jones Industrial is in the low 8000’s after it hit its high in the 14,000’s about a year ago. Many believe that we are in a recession equivalent to the Great Depression, and many believe it is because of the interference the government had on the markets.
Subscribe to:
Post Comments (Atom)
1 comment:
It’s interesting you brought up the idea of laissez-faire and ask “shouldn’t we allow the market to decide where the price falls?” Although I do like that idea, that’s not how it works in the oil industry. OPEC is a dominant firm oligopoly; this means they control 40% or more of the market shares. Currently OPEC controls about two-thirds of the world’s oil reserves. The dominant firm model considers OPEC a cartel and assumes that OPEC members have unified goals and collectively set the price of oil. The demand for OPEC's oil is "residual" demand. OPEC sets the price where the marginal revenue equals marginal cost and the competitive fringe will supply up to where P = MC; afterwards, OPEC will supply the rest. The Dominant firm must take into account the competitive fringe firms in making its price/output decisions, which is referring to the non-OPEC oil producers such as Mexico, the North Sea area, United States, China, Russia, India, Argentina, and Egypt. With that being said, OPEC has a quota system; each country is using strategic planning to control how much oil enters the market to control the prices. Although we may personally feel gas prices are too high as it is, oil companies see that they are not getting enough profit. With crude oil costing nearly 70% of the real gas price, a lot gets divided into tax and other expenses. In addition, we are gradually running out of oil, so as supplies decrease, and demand continues to grow, we will see gas price climb once again.
Now let’s talk about what you brought up about the current economical crisis. Yes it is true the government frequently implement policies that would benefit large companies, for example the bailout plan to save the “fat cats” on Wall Street, but in reality it is actually used to save us from another Great Depression. During the Great Depression, the Fed acted too late or didn’t act enough that allowed the economy to spin out of control and hit the Great Depression. Today, the Fed is doing everything they can by taking over failing banks and by taking over firms that failed like Fannie Mae and Freddie Mac. In this case they don’t want history to repeat itself but it might happen anyway due to the war on Iraq. This goes back to the original subject about OPEC. The OPEC nations are generally located in the middle east so by going into the War on Terrorism, we actually intruding on their territory which obviously they would be mad. In an act of retaliation, they might cut back their production of oil. We saw this in 1979, there was the Iranian revolution, followed by the Iran-Iraq War in 1981. In the 1973, OAPEC stopped shipping oil to the West because the West supported Israel. Thus it triggered an oil shortage that skyrocketed prices in the U.S. The 1979 energy crisis, oil production in Iran nearly stopped. In both cases, there was a dramatic decrease in oil supplies because it had stopped shipping to the U.S. So yes you are right, history do tend to repeat itself. It’s up to mankind to learn from these mistakes and prevent future mistakes.
Post a Comment