Relevant and even prescient commentary on news, politics and the economy.

Oil Price Speculation

Robert Waldmann

I almost feel I might disagree with Paul Krugman about international economics with imperfect competition. In particular Krugman confidently asserts that the wild swings in the the price of petroleum are the result of simple supply and demand curves (which are both extremely price inelastic so almost vertical) and not of speculation. He argues that speculation can only affect the spot market price via hoarding. Given supply and demand curves, the only way to affect the spot price is to take product off the market. This didn’t happen during the period of increasing petroleum prices so it was peak oil not speculation.

Given supply and demand curves.

So what do we have to assume to get supply and demand curves ? After the jump I wonder.

update: Well that was quick. Rule number 1 never debate Paul Krugman. Rule number 2 when Krugman seems to be wrong, look at rule number 1.

Krugman has a new post on oil prices and speculation. He notes that this time the price increase is clearly being caused by speculation (which might be perfectly rational) as is shown by the build up of inventories of stored oil above the ground. This means that my theory (after the jump) about how speculation can affect oil prices without causing large inventories of oil above the ground is false unless I can explain what is different now compared to a year ago. This is possible (spare oil tankers not required for shipping are being used for storage) but does sound like special pleading.

To have supply and demand curves it is sufficient (but not necessary) that there be perfect competition. The fact is that some economists tend to accidentally assume perfect competition without thinking. Paul Krugman is not one of those economists and, besides, competition in the market for petroleum is very famously not perfect (remember OPEC ?).

It is also possible to derive a supply curve for a monopolist or for a Cournot oligopoly. To get a supply curve from a cartel one has to consider game theory, but I’d say OPEC can be considered to be Saudi Arabia plus free riders.

However, and crucially, the derivation assumes that the suppliers maximize the present value of revenues. Perfect competition is not needed, but rationality is.

Clearly the fact that Saudi Arabia has oil and wants other things can’t imply anything including a supply curve. If they are total crazy fools they might do anything.

Also, importantly, under imperfect competition the cost of a small deviation from the optimal present value of revenue maximizing price is small squared. The cost of huge pricing errors is huge squared, but after decades of near price stability a boundedly rational non fool might have little idea about pricing as the costs of mistakes are tiny even calculated with the benefit of hind sight.

So how about this model. Saudi Arabia charges a spot price which is a simple function of the futures price and pumps enough to meet demand. They follow this rule unless they are pumping at capacity, in which case they charge a higher price, or less than half of capacity, in which case they charge a lower price.

The futures price would then feed right into the spot price so long as Saudi Arabia is pumping between half and full capacity.

The hoarding of oil is all under the Saudi desert.

The only difference between my model and Krugman’s is that Krugman believes that Saudi Arabia has long been pumping all it can. True Saudi pumping capacity is, in fact, an unobservable variable. One can’t tell if futures market speculation controls the spot price of petroleum without knowing how much oil Saudi Arabia can pump. They are telling us a number, but they are presumably lying so we just don’t know.

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Megan McArdle Has a Question

by cactus

Megan McArdle Has a Question

Megan McArdle has a question:

What happens to the cottage industry among Democratic-leaning armchair economists grinding out analyses proving that Democratic presidents are, like, totally awesome for the economy? Presuming that we’re stuck–as seem very likely–in at least a couple of years of really grinding low-to-no growth, Obama is going to destroy their figures. Are we in for a resurgence of belief in exogenous growth factors?

Given my co-author and I will have a book out next year that McArdle and her readers would consider “analyses proving that Democratic presidents are, like, totally awesome for the economy” I figure I’m qualified to respond. (BTW – regular readers of this blog know how hard I have tried to get across the not so subtle and one would think completely obvious point that if one band of sorry oafchucks is less bad for the economy than the other band of sorry oafchucks, that doesn’t in any way imply that the less sorry oafchucks “are, like, totally awesome.”)

So here’s my response: it depends on the motivations of those Democratic-leaning armchair economists, doesn’t it? The right is not the only side with its Mankiws and its Sowells. There are plenty of those on the left too, and they’re no different than their right wing counterparts. They believe that a (D) following some politician’s name is short-hand for “that human being is somehow laudable.”

But there are others who believe that a (D) is short-hand for something else, namely that the politician generally hews a bit more closely to a particular set of policies that have worked a little better than the policies adhered to by people who have an (R) after their name. Its not a guarantee of performance.

I have noticed that many people who take the second approach have been criticizing Obama’s approach even before he took office. I for one have posted (over and over and over) on the folly of bailing out the financial institutions that have caused this mess (since when is taking from the poor and middle class and sending to the fabulously wealthy compatible with the policies that generally define Democrats?), and I’ve had a few posts noting that Christina Romer was a very poor choice for CEA chair (Mankiw’s endorsement alone should have been a tip-off even to someone who never read her “narrative economic history” paper).

Sure, exogenous factors do matter. Truman was a Democrat, but the economy was awful for the first few years of his administration; transitioning from WW2 to a peacetime economy ain’t easy. And it sucked in 1933 too, which was FDR’s first year. This despite the fact that annualized, real GDP per capita grew much faster under FDR than any other President over the time period for which the BEA computed GDP, even leaving out the War years. Which also indicates something else – the economy might still turn out alright despite the many Obama mis-steps. Time will tell.

But there are a few other things – for one, you don’t have only one (R) or (D) administration to look at. You have probability and statistics. (And to forestall the point that inevitably gets brought up again and again and again and again, that’s what degrees of freedom are for.)

And while no theory is perfect, the better ones require fewer exceptions. If Obama starts acting like a Democrat and the economy still sucks by the end of his term, that means Democrats have to explain away Obama and Truman. Republicans still have to explain why Republicans generally do so much worse when it comes to real GDP per capita growth rates. The BEA has only been calculating real GDP per capita since 1929, and yet the best performing Republican, Reagan, is beat out by four Democrats, and all but one of the entire bottom half of the sample is taken up by Republicans. Tip to Megan McArdle: nobody can tell you for sure who’s going to win next year’s World Cup in South Africa, but betting on Grenada to pull it off is a bad idea.

And then there’s the question that McArdle herself keeps bringing up – the mechanism. The mechanism doesn’t apply if you don’t have the right inputs. As I noted above, Obama has not yet behaved like a Democrat; his policies on the bail-out have been essentially the same as those of his predecessor who most certainly was no Democrat.

So in the end, here’s what I say to Megan McArdle: ask your question again when Obama starts doing things a Democrat would do. Pushing through the “public option” on a healthcare would be a start.

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Stimulating! Stimulating! The Conservative’s Case

Andrew Samwick states the obvious, clearly and well:

I think we are now 18 months behind where we should be in moving forward with sensible government spending plans. We should have pulled the fiscal policy ripcord in January 2008 with a public investment plan designed to repair our aging infrastructure. I’d rather have the 18 months back — as would the millions of unemployed workers who could have been collecting a paycheck if we had started sooner — but the proper course of action today is the same as it was then.

You know what’s coming next, don’t you?

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Political Will has always been a Debased Coin

Gary Farber lays out the details of who the real “silent majority” were in the Nixon Administration’s approach to Viet Nam, using Nixon’s own words.

Such as this, from 20 January 1973—two years and three months before the ultimate U.S. withdrawal:

Nixon realized that the Communists were going to win in Vietnam. “I look at the tide of history out there,” he said in the Oval Office, “South Vietnam probably can never even survive anyway.”

Go read the whole thing.

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In Defense of Sarah Palin

by cactus

In Defense of Sarah Palin

I don’t know what Sara Palin’s plans are, nor do I know precisely why she resigned. If I had to guess, there’s a scandal waiting to erupt. Perhaps not – she isn’t leaving her job for several more weeks, and if a scandal is about to erupt, she might not be out of the limelight in time.

But be that as it may, whatever her reasons, I think Palin is doing the right thing. She’s become something of a laughingstock to much of the country. More importantly, to her constituents, she’s gotten herself embroiled in a number of scandals and her approval rating has started to drop (though she’s still above 50% from what I can tell) and her effectiveness is starting to drop. At some point, the naif who came to the capital city and got some stuff that obviously needed getting done but that only an outsider would do mantle fades away to be replaced by “holy $#%^, we’re governed by a nincompoop.” Leaving now, she gets out the door before that transition is accomplished in the minds of many Alaskans and she may be remembered fondly going forward.

That rarely happens in public life. More common is the model followed by our illustrious recently retired President. He accomplished his main goal early – cutting taxes. It didn’t accomplish what he had in mind, of course:

The President’s plan will accelerate this trend to record rates by retiring an historic $2 trillion in debt over the next 10 years. Under the President’s budget, the national debt will be only seven percent of Gross Domestic Product (GDP) in 2011, its lowest share in more than 80 years. (See Chart 1–1.)
Indeed, the President’s Budget pays down the debt so aggressively that it runs into an unusual problem—its annual surpluses begin to outstrip the amount of maturing debt starting in 2007. This means that the United States will be effectively unable to retire any more debt than what is assumed in the Administration’s Budget over the next 10 years—the President achieves ‘‘maximum possible debt retirement’’ in his budget.

And the longer he stuck around, the more failures he accumulated… nobody said anything about turning over Iraq to kleptocrats or Afghanistan to fanatics, the jobs we were promised never came about, the ownership society turned out to be a joke, and the so-called comprehensive energy policy we were going to have turned out to be pretty good for Exxon, but not so much for the rest of us.

But there was a sweet spot – somewhere around 2003 or at most 2004 when his popularity was still high, when his accomplishments still hadn’t fallen apart – had he resigned at that point, he’d be remembered fondly. And it would have been the patriotic thing to do; if he had managed to noodle out that he was way over his head (despite the fact that the more oblivious believers would still be talking Mount Rushmore for a few years to come) and put someone else in charge, the country would probably have been better off. But he stayed on past the point where even some of the folks not bright enough to avoid soiling themselves through the National Review had realized he was a disaster. By doing so, GW dishonored the Office of the President. Had he quit before that, things would be very different. He would have left a message to posterity that it is better to walk away than continue to inflict his incompetence upon the nation.

That would have been an act of greatness.

But its not just morons who have such a historic opportunity. Carter was generally regarded as a smart guy, and he accomplished some positive things while in office, but after a few years, it was fairly clear he simply wasn’t up to the job. He should have been smart enough and patriotic enough to step aside. Nixon was another smart guy, and he too had some early accomplishments, but he was also out of his league; had he resigned for that reason, rather than as a result of Watergate, we’d remember him well today, despite the economic disaster he spawned.

Unfortunately, we haven’t had enough Presidents who are humble enough to admit they are out of their league and patriotic enough to walk away on their terms. LBJ came close; he achieved a lot in 5 years – the fastest annualized growth in real GDP per capita of any President since FDR, the Great Society, cutting poverty significantly, moving Civil Rights forward, etc., but he simply could not solve Vietnam, and the economy was starting to strain. LBJ could have run once more, and perhaps he could have won, but he was done.

Of course, it isn’t just Presidents who can’t come out and admit their incompetence; we have no shortage of imbeciles running everything from big corporations to school boards. So here’s to Sarah Palin, who had the strength, for whatever reason, to tell her constituents they’d be better off if she gave up the top spot to someone else.

by cactus

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Goldman Sach’s doubles bonuses?


After looking at Spencer’s charts on job loss for the month, and the decrease in hours worked in a week I felt bad. However,the WSJ announces that:

Business is back on Wall Street. If the good times continue to roll, lofty pay packages may be set for a comeback as well.

Based on analysts’ earnings forecasts for 2009, Goldman Sachs Group Inc. is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm’s $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007, according to analyst estimates reviewed by The Wall Street Journal.

Rolling Stones’s Matt Taibbi discusses Goldman Sachs Group Inc. influence and apparent ability to profit from a variety of situations. It also does not take a ‘conspiracy’ to accomplish…(hat tip MG) .

A fine American tradition continues. No false modesty there. How did they do that?

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Joe Biden? The Map Office is Calling!

by Bruce Webb

The blogosphere is alive with news that Joe implicitly green-lighted an Israeli attack on Iran. Well I had my say here and there. I just want to share a map from Cordesman and Toukan’s Study on a Possible Israeli Strike on Iran’s Nuclear Development Facilities in part because it tells its own story. Plus it’s pretty damn cool looking.

Gosh if a ‘sovereign’ Israel just decides to bomb Iran who could possibly blame the U.S.? It is not like we totally control Iraqi air space.

Oh wait.

Israel cannot attack Iran without material assistance from the U.S. which at a minimum means refueling assistance and emergency landing fields. Full stop.

Update 2. Well the map apparently didn’t tell the whole story. So here is Cordesman and Toukman’s ‘Mission Analysis’. Note the mismatch between refueling requirements and actual refueling planes in the Israeli fleet. Note too that the analysis assumes zero effectiveness among Iranian Air and Ground Defense. Iranian pilots may be as bad as Buff assumes, but I don’t think we can say the same thing about Iran’s large supply of Soviet built surface to air missiles.

(update- JS Kit doesn’t recognize my phone. So I will respond to comments here

The Sunday Times (UK) released a very short report based on a supposed secret briefing by Mossad to Netanyahu about some clearance by Saudi Arabia. The only source actually named in the story is John Bolton and considering the J Post/Sunday Times/Murdoch/AIPAC nexus I am waiting for some more authoritative sourcing. For example Haaretz is today reporting an official government denial.

As for the Eitan it is an unmanned turbo-prop more designed for surveilance than bombing hardened targets with its negligible payload. It would be shot down the instant it went under 20000 feet. At 40000 ft it is practically untouchable. Then again so was the U-2-we thought.

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Industrial production, real imports , real retail trade & inventories

By Spencer,

Every month the various economic indicators are released and various people comment on them– usually in isolation.

So I thought it would be informative to look at some of the key releases since the December, 2007 peak together. As the chart shows, industrial production and real imports have fallen much more than real retail sales.

At least my first reaction to this chart would be to think that this combination should generate a major decline in the I/S ratio. But, as the second chart shows all the sharp drop in industrial production and collapse in real imports has done is to keep the I/S ratio from continuing to deteriorate. The I/S ratio is barely below its cyclical peak. The normal cyclical pattern is for the I/S ratio peak to coincide with a bottoming and strong rebound in consumer spending. Consequently, the I/S ratio normally improves as much or more because sales are rising as inventories are falling. But this cycle sales are just bottoming and not rising sharply –partially because of the rebound in savings. So further improvements in the I/S ratio is likely to require continued declines in industrial production and real imports.

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Just Because You’re Paranoid Doesn’t Mean Law Enforcement Isn’t Out to Help You

From the coolest possibly-corporate-espionage story of the week:

If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases… especially those that allegedly involve Goldman Sachs.

The original is from Reuters.

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