RE: [MLUG - DISCUSSION] Unfolding Universe (discovery channel)

[Jonathan King <EMAIL:PROTECTED>]

On Mon, 10 Jun 2002, "(8?»" wrote:

> *Big snips*
> 
> At 01:27 PM 6/7/2002 -0500, you wrote:
> 
> >Actually, I'm trying to argue that this emphatically not the case.
> >*No* commodity is really the basis or foundation of modern society.
> >Countries that specialize only in the production of commodities
> >have, as a rule, *less* power and smaller economies these days.
> >One reason for this is that the primary products of a
> >commodity-dependent exporter are...wait for it...commodities.  Lots
> >of countries can produce them.  Yes, some commodities can become in
> >the short or even slightly longer important enough to have political
> >implications.  Consider for a moment: the really infuriating thing
> >about the Bush energy policy is that it places supreme importance on
> >things that are really not very important, and no emphasis on things
> >that could well be.  In other words, it's a bad policy primarily
> >because it *uselessly* enriches one industrial sector over others.
> >If oil really were as horribly important as you seem to suggest,
> >than the Bush policy (while it still might be bad) would be at least
> >explicable.
> 
> You lost me on that last sentence, but Bush's oil policy focus
> seems fairly self-explanatory to me.

The energy policy seems to try to maximize the revenue potential of
energy companies subject to a few small tweaks here and there.  I
agree that it's pretty straight-forward on that basis, but as a
*government policy* to help the general welfare?  I'm just glad I 
don't have to do those press conferences. :-)

> We are arguing 2 different things here. I agree with you that
> countries that produce commodities hold no power, since there is
> no ability to differentiate products. That commonality does not
> negate how critical a certain commodity might be when considered
> in light of global supply and demand forces though.

But (if I understand you correctly) I think it does.  How critical
or important any particular material (or technology) is depends
pretty strongly on the current technology being used to produce
whatever it is we're *really* interested in, which (outside of food
production) is not necessarily a commodity.  History is full of
demonstrations that "critical" inputs can become dramatically less
important pretty quickly once there is any incentive to minimize
their use or work around them entirely.  If all your country can do
is produce raw materials, you are just not in a strong position even
if you "luck out" and produce many of the rarest and most desirable 
ones.  So South Africa is a gold mine for, well, gold, but also 
diamonds, platinum, tungsten...the list goes on and on.  They even 
have (or have had) market corners on some of these.  By African 
standards, it's a pretty impressive place economically, but I don't 
think I need to say much more about its history or future prospects 
here.

 
> Whoever controls the ability of a commodity to move has an
> advantage over markets.

Yes, but there are two difficulties here.  The first is that it is
phenomenally tough to control the market in most of these
commodities, and control itself tends to be unstable if there's any
prospect of a new or existing producer "cheating" on you.  So you
may be familiar with the De Beers story, which has to be the best
success story of this kind ever.  But I think it's getting clear now
that in the long run, they are just totally busted.  And the only 
reason they've gotten away with it so long is the fact that gem 
quality diamonds are just not that important in the big scheme of 
things.

The second problem is that neither supply nor demand are constant
over time or independent of price.  Once anything critical gets
expensive enough, other potential producers have an increased
incentive to get into the market, while users of the product look 
for substitutes or new technology to eliminate the issue.

> Normally this is not the producer, but with oil, OPEC has
> created an exception. Their control is not absolute, but can
> still be implemented.

I'm not so sure of this.  With a few exceptions, the whole history
of OPEC has consisted of making moves to set particular production
quotas and prices controls, not really hitting them, but then
declaring victory anyway.  They have certainly had some positive
effect on their own fortunes since they have some control and
discipline, but if you look at the real price of oil over time, it
hasn't really gone up much outside of the obvious "spikes" (and is
still down substantially in real terms from the early 80s).

> In 1972, the OPEC embargo proved this to be the case. The
> embargo was ended (for practical purposes) when Venezuela made
> up the short-fall, becoming our largest supplier at the time.

That's only part of the story.  In the short term, yes, we did the 
political wheel/deal thing.  But other parts of the solution 
included:

1) Production in the non-OPEC world increased as the price 
   did (although much of that increase crashed in the 80s).

2) The US actually began a semi-serious conservation/fuel conversion
   campaign.

3) Big improvements in fuel efficiency (cars most obviously, but
   also furnaces and really pretty much everything else).

4) Oil embargoes are difficult to stage and expensive to maintain.

The reason why we can/could be such energy wastrels in the SUV 
age was that prices had crashed so much for these and other reasons.

[snip the continuing depressing story of Venezuela and US policy 
there]

[snip some background on what does not rely on oil and oil's 
cheapness]

> >US oil companies possess both superior
> >capital and superior technology.  *They* make out fabulously well
> >(pun unintended), which helps create the illusion that oil
> >production is a big money venture.  But these days you have to be
> >something like Kuwait or have the Permian Basin in your backyard for
> >oil to be the basis of anything like a first world economy (or have
> >something smaller, some other prospects, and only 4 million people,
> >which is the Norwegian strategy.  Really, do the numbers if you
> >don't believe me.  All of the crude oil in the world doesn't add up
> >to anything really that impressive.
> 
> I wouldn't say that oil is the cheapest (many costs other than
> the pump price), just the first to dominate (just like I
> wouldn't say M$ is a leader due to quality).

Markets tend to lead to the result that the cheapest fuel for a
given purpose is the one that gets used.  In the case of
automobiles, the reason why we use gasoline is that, with *current*
technology, only gas or diesel fuel has the combination of energy
density, relative safety, reliable supply infrastructure etc. for
the kind of cars that people are willing to drive.  LNG is used in
(some) busses because it is the cheapest fuel in those situations.
There were in the past steam-powered cars and trucks (and trains),
but gasoline-powered ones became cheaper and better.  (With trains,
the situation is a bit more complicated, but the diesel-electric
locomotive is a big advance over older technologies.)

It is good to point out that the pump price in the US is not really
the total cost (it would be higher if we forced it to include
expenses that the government now pays for in different ways).

The point you make that sounds like "technology lock-in" (aka
increasing returns to scale) is also important, but what that can
usually only accomplish is change (delay) the switchover point.
So DVDs are much cheaper to make than videotapes, and a much higher 
quality product, but you did see lots of people arguing that they
wouldn't take over the market "any time soon".  At which point 
that's just exactly what they did. :-)  But we did have to get to 
the point where DVD players were just as cheap as VCRs so that 
enough of them got bought so that enough movies got shipped to the 
new format so that more people bought DVD players and...

[As an aside, I think M$ knows exactly how precarious their position 
 is now, but I'm not sure they have really found a solution.]

> As is the case in any power structure, those at the top want to
> stay there, and aren't interested in alternative fuels
> (competition).

Nobody wants to compete, and the status quo is really the best 
situation for oil companies.  But it would take a lot of stupidity 
and hubris for them to completely miss the riskiness of their 
situation in the long-run.
 
> You also hit upon another factor of production that is tilted in
> favor of the US, the fact that it is capital and tech sensitive.
> As long as it is western $ financing production, the producing
> country is out of the profit loop.

I'm not sure what you mean here.  My point was that US oil companies
do well because they are technology leaders who have lots of money.
Oil-producing countries have tended to do less well because the
profit in crude oil isn't that huge even in the best case, and
because what profit there has been has not always been invested or
spent wisely *at all*.  Sure the West hasn't been helpful or moral
in suggesting alternatives (e.g., "wanna buy a dam?"), but not even 
Norway or the UK have been able to solve too many problems using
oil money per se.
 
[snip about oil supplies and war time economies]

> >Wartime scenarios are, of course, incredibly important if you're at
> >war (or planning to be) and the war is against a superpower or is a
> >global war.  If you are not at war, then almost everything is
> >different.
> 
> We are in a permanent "war-time" economy now.

Um, no we aren't.  I know you're probably being sarcastic here (it's
*so* hard not to... :-)), but I don't think the current situation 
has anything to say about the importance of the world's oil supply 
in the big scheme of things.

[snip Roosevelt, etc.]
 
> > > http://www.ibiblio.org/pha/policy/1944/440722a.html
> >
> >Just one problem here.  Commodities are cheap by nature, which is
> >why they are called commodities.  There are certainly problems with
> >the IMF and with multinational corporations, but blaming them for
> >the cruel economic truth that world sugar prices are always going to
> >suck is really missing the point.
> 
> Once again, you are confusing raw material producers with the
> processors/middlemen who attempt to maximize their profit,
> maintain market share, and outsmart the competition through
> careful planning. You could call this free market dynamics, or
> an attempt to control commodity markets.  Just because there is
> no ability to differentiate price, doesn't mean that something
> isn't valuable. As soon as someone gains leverage over the
> market, they go from a price taker to a price maker.

I think we're talking past each other.  Sugar is a commodity.  It is
cheap to produce, reasonably cheap to transport, widely used, but
not that useful to an end consumer.  The only way to raise the price
of plain sugar is to cut the supply or increase the demand.  In the
US, we raise the real price (a lot) artificially through
agricultural subsidies and boycotts/tariffs implemented by the
government at the request of (and ensuing payment by) domestic sugar
producers.  In a truly fair market, the amount of domestic sugar
produced in the US would in fact be close to zero.  But as it is, we
take our lumps (har har).  Another reaction to the
higher-than-it-should-be price, though, is the development of
corn-based sweeteners, which are now pretty much where industrially
provided sweetness comes from in foods from twinkies to spaghetti
sauce.  That's the setting.  Outside the US, the price of world
sugar is so low that almost nobody should be producing the stuff
(unless they can smuggle it to the US, and even that's a stretch).
Demand for sugar is hardly zero, but the supply is huge.  The only
ways to make real money in sugar are to sweet-talk a government into
something, or to use it (and other stuff) to make some product that
people really like and are willing to pay for.  Candy is made of 
sugar (or some sweetener) plus other cheap ingredients, and sells 
for a pretty huge multiple over its commodity input price.  

The only argument I can see here for you is that world sugar prices
are so low only because producers are being forced to make the stuff
or else.  The problem with that and tracing it back to the US (for 
example) is that low world sugar prices are essentially irrelevant
here.  If we stopped supporting sugar tomorrow, world prices would 
go up some, but they would be limited by the price of other 
sweeteners, and there is still no way to make very much money here 
outside of illegal market manipulation, and that's still as tough to 
do as ever.

> Given all the rambling I've done now, it has become obvious to
> me that commodities are much more valuable than their price
> dictates. Since they operate on a simpler supply/demand curve
> than non-commodities, it is easier to predict/influence revenue
> (supply).

And I still disagree with "much".  *Some* commodities do not include 
a substantial component of their real cost, but not many.
 
> The only way to influence supply, is through control. Oil production BTW, 
> peaked in the US in the early 70's, world production is predicted to peak 
> within the next 3-7 yrs. At that point in time, supply and demand curves 
> will forever move away from one another, and prices will rise without end.

Baloney.  Nothing that cannot go on forever will actually go on 
forever.  Gotta run.

jking

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