Priced in gold, do oil producers want a high oil price or a low oil price?
The answer, I think, depends on how much oil the oil producers have left. And just to clarify, when I refer to "oil producers", I'm not talking about individual companies, I'm talking about all oil producers, or, at least, the middle eastern collective of oil producers.
Initially, when the oil producers have lots of oil, they would want a very high price for their oil.
Counter intuitively though, when their oil reserves start to run low, they would want a lower price for their oil.
To understand the rationale for this, consider for a moment the balance sheet of the oil producers, and how it changes as their oil reserves decline over time. Initially, they have 80% oil and 20% gold, so they want as much gold for their oil as they can get. However, when their balance sheet is %20 oil and 80% gold, they are much better off with higher gold prices than higher oil prices, as this will better their future purchasing power. Hence, they will seek (are seeking?) a lower gold price for their oil.
So, "peak oil", or the dwindling of world oil supplies, will ultimately cause the price of oil to fall relative to gold, or conversely, the price of gold to rise, relative to oil.
Now consider oil priced in any fiat currency - the "dollar". The reduced supply of oil combined with the exponentially increasing money supply will ultimately cause the dollar price of oil to increase.
Logically then, having three exponential forces acting upwards on it, the dollar price of gold must increase over the peak oil time frame.
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>> Counter intuitively though, when their oil
ReplyDelete>> reserves start to run low, they would want a
>> lower price for their oil.
Hmm .. not so sure about this.
Suppose that
1) you have a $***load of oil, and a $***load of gold.
2) you make a decision to convert a barrel of oil into gold.
Do you want to
a) get as little gold as possible for your barrel of oil; or
b) get as much gold as possible for your barrel of oil?
Bit of a no-brainer. Of course you do have the option of just keeping your barrel of oil, but anyone who thinks that you decrease the price of something by limiting its supply is kind of flying in the face of just about economic theory over the lasts few hundred years (and no, oil is not a Giffen good).
Just because you _want_ your gold to be worth more than it is is irrelevant. I would like my house to be worth more than it is, but I don't control that. I might get together with a bunch of other house-owners to conspire to increase the price, but look at your supply-demand graph: the only way to increase the price of a good is actually to decrease the number sold. (Likewise the only way to decrease the price is to dump a whole bunch of product on the market).
OPEC works by limiting supply. It is an uneasy alliance which continually breaks down, and needs renegotiation.
You can't just decide 'I want to sell as much of my product that I want to at price X' and do it. There has to be a market mechanism.
This is what politicians don't get. For instance:
"We (the poor) will sell as much labor as we like at our chosen price (the minimum wage)."
And then "why do we have unemployment?" followed by "the market must be to blame".
Studying free markets will lead you to conclude that price fixing and collusion are short lived and insignificant. Studying price fixing and collusion will lead you to conclude that free markets are short lived and insignificant. (Me, today)
ReplyDeleteFirstly, let's address the "desire" aspect. Your example was at the 50:50 (shitloads:shitloads) point in time, whereas I was specifically referring to point in time where oil supply was dwindling. Consider that, as you sell your last barrel of oil for gold, it matters not what you get for that barrel, but what your other wealth is worth. So, as your oil supplies begin to run low, a higher price of gold is more important to you that a higher price of oil. So _if_ you could arrange that, you would.
You say that you want your house to be worth more, but you don't control that. But what if "you" were "Australia" (ie, the power broking elite), would you not control that? If Australia wanted their houses to be worth more, could they not meddle with immigration, credit availability, interest rates, tax deductions, inflation, foreign ownership rules, etc?
So, we are not talking about individuals, we are talking about big players.
Do free markets exist in Oil, Gold or USD?
Manipulation, price fixing and collusion come in many forms. The Western bankers control the supply of USD as well as their derivatives (Bonds, Banking Credit, and derivatives of those (Credit Default Swaps, Mortgage Backed Securities)). It is a similar story for gold, except that they also control the exchanges (Comex) and the umpires (CFTC).
In promoting the USD, the Western banks have had to fix the price of gold artificially low. They do this primarily by controlling the price of the derivatives, but also by keeping gold-for-oil deals off-market. And BTW, the bankers scheme is to increase the amplitude of the price swings and controlling the timing of the price direction changes - thus profiting from and promoting "dangerous"
volatility.
So, raising the price of gold is not as difficult as it might first seem for the oil elite. It doesn't so much involve creating price fixing schemes, so much as removing them.