Evidence that Stef really doesn't get economics

http://freedomainradio.com/integrated_board.html

This thread contains a podcast where Stef argues that we should be happy about high gas prices. In some ways his conclusion is correct but his argument to get there shows a very shallow understanding of economics.

First of all Stef shows a fundamental misunderstanding of the oil market. He makes the argument that oil prices are going up because lower cost producers in emerging markets are purchasing oil, which allows them to produce lower cost products. This is almost entirely untrue. Oil is predominantly used as a transportation fuel and only makes up a very small portion of the electricity market and therefore is only slightly effected by increases in industrial capacity in emerging markets. Oil prices are predominantly driven by consumer demand and volume of world trade (fuel cost of shipping goods). Higher consumer demand in emerging markets surely does proceed from strong economic growth, but this consumer demand in foreign countries does not benefit us; these foreign consumers are now competing with us for the same goods that we want and driving the prices up.

This leads me to my next point: Stef does not understand the direction of causality. Around the 7 minute mark Stef begins an example concluding: "The more a manufacturer is willing to bid for oil, the cheaper his eventual products will be." Setting aside that his whole example doesn't make much sense and the steps in his reasoning don't really follow from one another, his conclusion is also completely wrong and not at all representative of what is going on with oil. The real reason this theoretical laptop manufacturer can bid more for oil is because demand is high and therefore prices for laptops are high (relative to a low demand situation). This has nothing to do with the "indian" manufacturer being the low cost producer. Both the "indian" and the "english" manufacturer would pay the same price for oil on the world market so this has no impact on their cost structures.

So what point is Stef trying to make? Economic liberalization throughout the world has resulted in more competition which has forced companies to improve productivity and reduce costs, which in turn has led to cheaper goods. As a consequence of this economic liberalization, producers in emerging markets have become more wealthy, which has allowed them to purchase more goods. This demand has then driven up global prices. In other words, high oil prices are actually an uncomfortable side effect (for us in the developed world) of the economic liberalization that has allowed us to enjoy cheaper products for the past ten years, and now is allowing people in emerging markets to raise their standard of living.

Even more interesting than the convoluted and confused nature of Stef's argument is that he completely misses the reasons why we should really be happy about high oil prices.

A. The current resource price boom is driving investment in regions of the world that have struggled to rise out of poverty. China has been infamous recently for aggressively investing in natural resource development in areas of Africa that desperately need foreign investment. Obviously there will be a lot of corruption in this process but integration with the global economy will eventual allow the people of these countries to pull themselves out of poverty.

B. High oil prices have encouraged massive investment into alternatives that in the long run will greatly reduce state power throughout the world. Governments around the world have long used control of the fuel supply to increase state power. A decentralized market for energy will break OPEC and decrease the ability of governments in consumer nations to control industry through regulation of energy production, imports, etc.

Of course acceptance of B would entail an admission by Stef that state power can be reduced by means other than his culty movement.

Number of posts: 434 Location: Red Deer, Alberta Registration date: 2007-10-16

Can the high price of oil (in US$) have anything to do with the following?:
-overstimulation of oil-based consumer economies by central banks through inflationary policies
-weakening of US dollar versus world currencies.
-tax breaks on gas-guzzling vehicles over 6000lb in US
-increases in US 'strategic reserves'
-heavy restrictions on offshore and ANWR drilling in US, for 'environmental' reasons
-wars threatened and prosecuted against oil-producing countries
-US 'failure' to get Iraq's oil production up and running again.
-planned pipeline from caspian sea basin to asian markets through afghanistan kiboshed.

_________________

http://tails-dx.deviantart.com/gallery/
My daughters art. =3

Guest

Static,

You say "this thread contains..." apparently referencing the link you placed above that statement. But I don't find a thread at that link, I just find Stef's entire forum. Did you screw up the link, or am I missing something?

- NonE

Guest

reddeerrick wrote:

Can the high price of oil (in US$) have anything to do with the following?:...

Since oil is basically the new gold, ie. the one global measure of value against which all economic activity is measured and hence by definition is the global monetary unit, yes, of course. It is related to everything.

My sense of it is that, just like DeBeers cartelization of the diamond industry for the purpose of restricting production and creating the consequent high prices of diamonds, the oil controling people are doing the same. I say "people," not nations, because I believe that the high level power flows are not contained within such boundaries as banks or nations or cartels, but rather are fluid manifestations of energy which are constantly morphing and reshaping their boundaries. I do believe that the entire Iraq war and related stuff is mostly for the purpose, not of gaining access to the Iraq oil, but rather, keeping it OFF the market so as to allow those who have control over the worlds major sources of oil to be able to sell it at an exhorbitant price and thus consolidate their power (money being a part of that power).

I will not go so far as to say it is a "conspiracy theory" with a band of people all agreed on one action, but I do believe that it is a very high level power play among "families" (groups of people pooling their interests and power), and which, just like the mafia families of old, both compete and cooperate with the general aim of milking the rest of the population for their own benefit.

The drug industry (illegal drugs) probably is second in world power to the oil interests and shares many interests and players. The world's military forces are basically just the hired thugs of the oil and drug interests and use the chimera of national interests as a tool to get others to pay for the tool.

All things big and small get tossed about on the sea of oil prices. Oil is like blood. We need it and we'll do anything to get it and so those in control of it are likewise in more or less control of us until we can find another life force to sustain us.

I hope that was somewhat coherent.

- NonE

NonEntity wrote:

Static,

You say "this thread contains..." apparently referencing the link you placed above that statement. But I don't find a thread at that link, I just find Stef's entire forum. Did you screw up the link, or am I missing something?

- NonE

it's this one i take it

reddeerrick wrote:

Can the high price of oil (in US$) have anything to do with the following?:
-overstimulation of oil-based consumer economies by central banks through inflationary policies
-weakening of US dollar versus world currencies.
-tax breaks on gas-guzzling vehicles over 6000lb in US
-increases in US 'strategic reserves'
-heavy restrictions on offshore and ANWR drilling in US, for 'environmental' reasons
-wars threatened and prosecuted against oil-producing countries
-US 'failure' to get Iraq's oil production up and running again.
-planned pipeline from caspian sea basin to asian markets through afghanistan kiboshed.

A. I wouldn't say overstimulation. Inflation isn't a problem in and of itself but only becomes a problem when it is so high that planning capital investments becomes difficult. In the long run production is a function of labor, capital, and productivity. Monetary policy does not factor in unless is grossly mismanaged (ie. zimbabwe, argentina). I mean this of course in an aggregate sense, within the aggregate some individuals are hurt by inflation.

B. This is one factor but not the only form of intevention that contributes to high oil prices. Not the least of these is the constant threat of greater regulation and windfall profits taxes. Oil drilling today is extremely capital intensive and investments can take many years to pay off. Oil companies are not going to reinvest in new production when their profits are consistently threatened. Another major subsidy is free roads. We would all drive a lot less if we paid tolls equal to the cost of road contruction.

C. US Strategic reserve purchases were recently suspended in a token political move. This will only make the smallest of dents in prices because it just doesn't make up a large % of worldwide oil demand.

D. This is the big one and is not just restricted to the two locations you mentioned. There are also restriction on exploration for natural gas in many areas. Furthermore, it is almost impossible to build a new refinery, so even if we could drill more oil we couldn't build the refining capacity.

E/F. As the price of oil has risen there have been supply disruptions all over the world as people fight to get a larger share of the profits. Production in Nigeria is shut down regularly due to violence. Venezuela has nationalized major investments by international oil companies. Russia basically disolved the largest oil company in the country because it didn't kowtow to the Kremlin. Mexico's constitution states that the Mexican national oil company Pemex cannot be privatized and cannot partner with foreign companies; as a result Mexico's oil production has been dropping for years. And of course the OPECs are still being OPEC.

Thanks for posting the correct link.

Static4367 wrote:

http://freedomainradio.com/integrated_board.html

This thread contains a podcast where Stef argues that we should be happy about high gas prices. In some ways his conclusion is correct but his argument to get there shows a very shallow understanding of economics.

First of all Stef shows a fundamental misunderstanding of the oil market. He makes the argument that oil prices are going up because lower cost producers in emerging markets are purchasing oil, which allows them to produce lower cost products. This is almost entirely untrue. Oil is predominantly used as a transportation fuel and only makes up a very small portion of the electricity market and therefore is only slightly effected by increases in industrial capacity in emerging markets. Oil prices are predominantly driven by consumer demand and volume of world trade (fuel cost of shipping goods). Higher consumer demand in emerging markets surely does proceed from strong economic growth, but this consumer demand in foreign countries does not benefit us; these foreign consumers are now competing with us for the same goods that we want and driving the prices up.

the good thing of course is that they can only consumer more because they now produce more which is good for us.

Quote:

This leads me to my next point: Stef does not understand the direction of causality. Around the 7 minute mark Stef begins an example concluding: "The more a manufacturer is willing to bid for oil, the cheaper his eventual products will be." Setting aside that his whole example doesn't make much sense and the steps in his reasoning don't really follow from one another, his conclusion is also completely wrong and not at all representative of what is going on with oil. The real reason this theoretical laptop manufacturer can bid more for oil is because demand is high and therefore prices for laptops are high (relative to a low demand situation).

excellent point (although probably better to say 'because profits are relatively high' because price in itself does not work as an incentive. but that doesnt take anything away from your point that the primacy lies with increased demand. )

but I am not yet clear on what Stef means, so i should probably watch the video

Quote:

This has nothing to do with the "indian" manufacturer being the low cost producer. Both the "indian" and the "english" manufacturer would pay the same price for oil on the world market so this has no impact on their cost structures.

So what point is Stef trying to make? Economic liberalization throughout the world has resulted in more competition which has forced companies to improve productivity and reduce costs, which in turn has led to cheaper goods. As a consequence of this economic liberalization, producers in emerging markets have become more wealthy, which has allowed them to purchase more goods. This demand has then driven up global prices. In other words, high oil prices are actually an uncomfortable side effect (for us in the developed world)

this is what you say, right? not what Stef says? 'uncomfortable side-effect'
it seems to make sense to me.

Quote:

of the economic liberalization that has allowed us to enjoy cheaper products for the past ten years, and now is allowing people in emerging markets to raise their standard of living.

Even more interesting than the convoluted and confused nature of Stef's argument is that he completely misses the reasons why we should really be happy about high oil prices.

A. The current resource price boom is driving investment in regions of the world that have struggled to rise out of poverty. China has been infamous recently for aggressively investing in natural resource development in areas of Africa that desperately need foreign investment. Obviously there will be a lot of corruption in this process but integration with the global economy will eventual allow the people of these countries to pull themselves out of poverty.

and thereby start to produce more goods and participate in the worldwide division of labor

Quote:

B. High oil prices have encouraged massive investment into alternatives that in the long run will greatly reduce state power throughout the world. Governments around the world have long used control of the fuel supply to increase state power. A decentralized market for energy will break OPEC and decrease the ability of governments in consumer nations to control industry through regulation of energy production, imports, etc.

good point

Quote:

Of course acceptance of B would entail an admission by Stef that state power can be reduced by means other than his culty movement.

ha!

Static4367 wrote:

reddeerrick wrote:

Can the high price of oil (in US$) have anything to do with the following?:
-overstimulation of oil-based consumer economies by central banks through inflationary policies
-weakening of US dollar versus world currencies.
-tax breaks on gas-guzzling vehicles over 6000lb in US
-increases in US 'strategic reserves'
-heavy restrictions on offshore and ANWR drilling in US, for 'environmental' reasons
-wars threatened and prosecuted against oil-producing countries
-US 'failure' to get Iraq's oil production up and running again.
-planned pipeline from caspian sea basin to asian markets through afghanistan kiboshed.

A. I wouldn't say overstimulation. Inflation isn't a problem in and of itself but only becomes a problem when it is so high that planning capital investments becomes difficult. In the long run production is a function of labor, capital, and productivity. Monetary policy does not factor in unless is grossly mismanaged (ie. zimbabwe, argentina). I mean this of course in an aggregate sense, within the aggregate some individuals are hurt by inflation.

ah, so you disagree with with the Austrian School in economics? and reject their Business Cycle Theory?

Number of posts: 215 Registration date: 2007-08-18

NonEntity wrote:

Since oil is basically the new gold, ie. the one global measure of value against which all economic activity is measured and hence by definition is the global monetary unit, yes, of course. It is related to everything.

Oil can't function as gold as it is consumed in an irreversible processes

Conrad wrote:

Static4367 wrote:

reddeerrick wrote:

Can the high price of oil (in US$) have anything to do with the following?:
-overstimulation of oil-based consumer economies by central banks through inflationary policies
-weakening of US dollar versus world currencies.
-tax breaks on gas-guzzling vehicles over 6000lb in US
-increases in US 'strategic reserves'
-heavy restrictions on offshore and ANWR drilling in US, for 'environmental' reasons
-wars threatened and prosecuted against oil-producing countries
-US 'failure' to get Iraq's oil production up and running again.
-planned pipeline from caspian sea basin to asian markets through afghanistan kiboshed.

A. I wouldn't say overstimulation. Inflation isn't a problem in and of itself but only becomes a problem when it is so high that planning capital investments becomes difficult. In the long run production is a function of labor, capital, and productivity. Monetary policy does not factor in unless is grossly mismanaged (ie. zimbabwe, argentina). I mean this of course in an aggregate sense, within the aggregate some individuals are hurt by inflation.

ah, so you disagree with with the Austrian School in economics? and reject their Business Cycle Theory?

I think this is probably a difference of semantics though I would have to look more closely at the exact claims of Austrian Business Cycle theory. I think I would agree with them that short term business cycles can be effected by monetary policy as the market takes time to adjust. I think they would also agree with me that in the long run the market will return to its equilibrium.

I would add also that as markets become more efficient the length of business cycles shrinks as the market can react more quickly to changes in monetary policy.

Wikipedia has a decent summary of the ABCT

Conrad wrote:

Wikipedia has a decent summary of the ABCT

For the 2002-2006 cycle (and many previous historical cycles) the theory does a very good job, but consider the two other most recent cycles (in the US):

In our current cycle the Fed has dropped rates dramatically, but are we seeing irrational exuberance result from this in the market? It may be too soon to tell but I would argue that the answer is largely no? ABCT relies on the claim:
"Businessmen, in short, are misled by the bank inflation into believing that the supply of saved funds is greater than it really is."

What is going on now (so far) is that business people do not believe that the Fed rate is a good indication of the real rate. No one is fooled into borrowing/lending excessively at the reduced rate and the misallocation of resources does not proceed. If banks don't increase their lending then the low Fed rate is essentially just a subsidy that allows them to stabilize their balance sheets.

Our other most recent cycle was the technology boom/crash of 2000/01. In this case we definitely had a misallocation of resources, but this was largely due to irrational expectations about returns from technology companies, not due to misjudging the interest rate. The crash did result from the failure of bad investments, but people had misjudged the fundamentals of the investments, not the macro situation in the market.

The commonality between both cases is that investors didn't behave in the way the Fed "instructed" them to behave. As I mentioned in an earlier post, this becomes more likely as markets grow in terms of breadth and efficiency. Modern technology makes much more information available to market participants much more quickly. It also allows prices of assets traded on electronic exchanges to adjust much more quickly. Therefore, modern market participants are better able to judge whether the Fed action is appropriate given their own appraisal of the macro situation. As such today you could argue that the Fed responds to the market as much as vice versa. As an example, there are futures instruments that allow you to bet on the path of the Fed rates, so when Fed governors go into a meeting they know exactly what the market expects them to do and can predict the effect on the market of any proposed change. Any significant deviation from the action the market expects is going to have a predictable result.

You could argue that the reason the Fed rate had such an impact on the housing market is that housing is among the least efficient markets; prices adjust very slowly. If housing prices adjusted more quickly there would have likely been several sharp corrections on the way up that would have scared many of the speculators out of the market.

I should qualify this by saying that just because the internet boom/crash had significant non-governmental causes does not mean that the government didn't exacerbate the problem by fiscal and regulatory means.

Telecom startups were heavily subsidized insofar as the government required existing companies to provide startups with below market rate access to their networks.

Favorable sales tax treatment on e-commerce is another obvious example.

Number of posts: 434 Location: Red Deer, Alberta Registration date: 2007-10-16

I think it's pretty clear to most people that the FED is holding rates down right now only in an effort to reduce the number of foreclosures, is it not? I don't think we've yet seen the full unraveling of the last cycle, and oil is being driven up now by investors retreating from the financial sector, and seeing the next 'sure thing' in commodities, especially oil. I would imagine that the low interest rates are encouraging a lot of people to buy on margin, as well. I have to admIt that I'm no expert though, what do you think?

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My daughters art. =3

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Evidence that Stef really doesn't get economics

Evidence that Stef really doesn't get economics

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