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Brooks Wilson's Economics Blog: Thoughts on Revolution and Oil Disruption

Wednesday, February 23, 2011

Thoughts on Revolution and Oil Disruption

Revolution is sweeping through North Africa and the Middle East.  The governments facing this spontaneous uprising are universally totalitarian.  Some have had good relations with the United States and some have not.  No one knows if the new governments will be more democratic or less, or if more democratic regimes will be less friendly to the United State and our allies.  Assume the worst, that anti-American, totalitarian, radicalized pro-Iranian governments replace current regimes.  What will this mean for oil output and prices?

I believe that after a temporary spike due to the fear of disruption of or actual disruption of supplies, output and production will resort to their pre-revolution trend.  My conclusion is based on two assumptions.  First, like their predecessors, the new regimes will attempt to maximize oil revenue.  This means setting a monopoly price through OPEC or some similar cartel.  These countries are poor, and long-run reduction of production below the optimal cartel price would reduce economic activity leading to greater discontent.  The new regimes would face counter revolution elements in their own government willing to supply oil to the rest of the world and these challengers would be able to promise bigger rewards to backers than the current regime based on increased oil production.  Second, although the new regimes would set prices through a cartel, they would have as much incentive to cheat on cartel prices as those they replace, making it difficult for the cartel to maintain production quotas.  In short, the revolutionary frenzy may be bad for the U.S. diplomatically, it will not mean a great deal economically.

4 comments:

  1. The ugly truth is that no matter the rhetoric from Washington or from the radical elements of these oil rich nations, we need each-other. The political threats and strong language will eventually give way to simple economics. We desperately need what you have and you desperately need what we have.

    With all of the political games and posturing between Iran and the US, we nevertheless remain uneasy bedfellows. No matter the results in countries like Libya, political ideology and hatred will eventually give way to good economics and the invisible hand will guide the oil market.

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  2. Brandon Guthrie1/3/11 1:32 AM

    I agree. Even if the people who come to office in those places want to hurt us (America) it will be in their best economic interest to supply as much oil as possible to the US to boost their economy. The US is one of the top consumers of oil.
    Just a interesting thing I noticed - I keep a record of prices when I get gas and a similar event happened in 2007 where the prices of gas rose just as they are now over a few months. I believe the peak when I got gas was 3.74 and it stayed this way for maybe a month to a month and a half and then the price started to trickle down. Finally the prices went down to about 1.15!!!! Maybe this is something we can get positive light from and hope it may happen this time around.

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  3. Kersten Gonce1/3/11 5:35 PM

    I agree with Nathan and Brandon. Gas prices have shot up very much. The US is one of the top consumers of oil, and in bad times, our supplies can threaten us for it. The US will continue to be the top consumer of oil, its just nescessary. Gas prices will be at a high and will be at a low. As Nathan says, We desperately need what you have and you desperately need what we have." I totally agree with this statement. They will continue to give us oil, because they need us.

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  4. As I read through chapter 17 on inflation I was suddenly struck by the question: is the value of gas really higher now than ever before or has the price level just been rising with inflation. This blog entry is about oil so I thought it appropriate to post my comments here.

    Based on gasbuddy.com, the national gas average is 3.744 which seems to me to be very high. High enough to effect my desicions on a daily basis. However, is the value of gas higher than what I paid ten years ago, what my parents paid 50 years ago or what my grandparents paid 100 years ago? Well, here is the data base on the average price of a gallon of gas from 1918 to the end of 2010 adjusted for inflation:

    Inflation Adjusted Gasoline Prices
    Year Price
    1958 $2.26
    1968 $2.13
    1978 $2.17
    1988 $1.77
    1998 $1.36
    2008 $3.26
    2010 $2.73

    Based on this study, the long term average price of gas is $2.39. In 2011, I figure the adjusted price is somewhere around $3.10 for the year, which is less than one dollar more per gallon than the average over the last 100 years.

    It seems to me that most goods and services have maintained their value overtime. And even though we are at a point in time where gas prices are higher than normal gas is no exception, or at least its not as bad as it looks!

    Sources:
    gasbuddy.com
    http://www.inflationdata.com/inflation/inflation_rate/Gasoline_Inflation.asp (there is a cool chart here with this data)

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