Marginal Utility

by Ken Houghton

A letter-writer to Altercation asks about the legendary "$20 a barrel oil will pay for the Iraq War and then some" claim.

Rupert Murdoch is best known for having said it in an interview published 12 Feb 2003:

They'd certainly want to establish a democratic regime as soon as possible and they'd want to get out as soon as they can. It's got to be a question of handing the assets of Iraq back to the people of Iraq under a responsible government as soon as possible. I'm sure that's the game plan; what the time frame is, I don't know. The greatest thing to come of this to the world economy, if you could put it that way, would be $US20 a barrel for oil. That's bigger than any tax cut in any country. [emphasis mine]

But places such as NRO had already made the argument at length (17 Jan 2003):

War with Iraq is now likely, and timing of the war points to the first quarter. The war should end quickly with minimal casualties.

Differences between today and 1991 suggest that oil prices are unlikely to match the highs seen in 1990 — but that the correction [he means downward] is apt to be as severe. Here are the variables:

Iraq is a less important supplier of oil today....

A quick military victory could remove a major uncertainty facing world oil supplies....Under U.S. military occupation, oil exports would be expected to hold steady, as opposed to Saddam’s use of oil as a political weapon....The U.S. military will oversee oil production operations to secure volumes near Iraq’s current capacity of 3 million barrels a day or more, versus production of 2 million barrels a day in 2002.

Even if war is averted, oil prices should fall this year. The “no-war” scenario would likely come about if Saddam Hussein’s government complies with UN sanctions and cooperates with UN weapons inspectors. This scenario assumes a steadier flow of oil from Iraq in 2003 of, say, 2.8 million barrels a day, or 800,000 more barrels a day than in 2002.

And higher production from Iraq would consume all, or more than all, of the increased call on OPEC oil projected for 2003, leaving no room for higher output by the other ten OPEC members — for the third year in a row — unless oil prices fall.* The persistent erosion in OPEC’s market share and need for revenues is apt to push members to cheat further on production quotas.

A drop in oil prices to a more normal level, of $18 to $20 barrels a day [? - I assume this is an editing error], would stimulate economic growth and likely would be beneficial to many industries, just as it was in 1991.** [emphases mine]

But beating up the NRO is rather pointless, especially as they had abundant company.

One of the earliest sources appears to be the Jerusalem Center for Public Affairs (26 November 2002):

many analysts believe that if America were to help a "pro-Western" Iraqi government to develop the country's oil resources, such a price spike would likely be followed by a sharp decline in oil prices (possibly to well under $20 a barrel). [emphasis mine]

Business Week at least cited a source, beating Murdoch by a full six weeks (30 Dec 2002):

The oil threat from an Iraqi war is less immediate but potentially more severe. Lehman Brothers Inc. global chief economist John Llewellyn in London figures there's a 70% chance that there will be no war or an easy war with Iraq, causing oil prices to fall to $20 a barrel. But he estimates that there is a 5% chance that the conflict could spread to other parts of the gulf, potentially driving oil prices to $75 a barrel or more. Impossible? He regards the $3 price increase resulting from Venezuela's troubles as a warning: "It shows what even a modest supply disruption can do in a tight market." [emphases mine--and I want to play poker with Mr. Llewellyn]

And, of course, despite being a late-comer to the party (31 March 2003), Money magazine piled-on with an article CNN headed with "Iraq has been on the sidelines of the oil world for 20 years. Soon it won't be.":

Indeed, while rebuilding Iraq's decrepit oil industry could cost the U.S. billions of dollars, that will be more than made up for by lower oil prices over the long term. For starters, $20-a-barrel oil would probably bring prices at the pump back down to about $1.35 a gallon, well below the current average of nearly $1.71. For a typical SUV driver, that's a savings of $228 a year.***

*Note the contrast between Iraq "leaving no room" and the "third year in a row" declaration--which would include 2002, when Iraqi production was 1MM bbl below capacity.

**The 1991 production gain notably came from restoring Kuwait, not destroying Iraq.

***How's that working out for SUV drivers? Oh, yeah.

Labels: Economic History, Energy, Iraq, Oil, Politics

by Ken Houghton

Be Afraid. Be VERY Afraid.:

The Bush administration promised today to find someone quickly to succeed Paul D. Wolfowitz as president of the World Bank, and bring management skills to the job of healing an institution battered by the turmoil over Mr. Wolfowitz’s tenure.

To coin a phrase, "A fine mess you've got us into, Georgie."

Labels: Bushonomics, Economic Development, Economic History, Politics

by Ken Houghton

From a book on Business Process Management changes:

Flash forward [from 1970] to 1985. The median household income was around $23,618, more than double what it was in 1970 ["around $8,700"], although the cost of living more than kept pace with a 277% increase.

The short version is that, within estimation error, the median income was no more valuable in 1985 than it was in 1970.

Labels: Economic History, Income Inequality

by Ken Houghton

The classical finance assumptions were never reasonable first-order descriptions of investor behavior; the most that was ever claimed was that they were reasonable first-order descriptions of those components of investor behavior that did not cancel themselves out. [typo corrected; emphasis mine]

The whole post, in context, is here, and serves as a cautionary tale.

Labels: Brad DeLong, Economic History, Economics

by Ken Houghton

Thoma posts Galbraith on Bartlett. Bartlett responds. Discussion ensues.

Go. Read. Especially the comments continuing the discussion.

Labels: Bruce Bartlett, Economic History, Economics, Economists View, James Galbraith, Supply-siders