Last September I posted an article on gas prices (to which someone had a very thoughtful Reddit response), why prices were falling, and how to account for price discrepancies within the United States. Since then, the international price of oil has kept falling and falling. Earlier this week the price even punctured the $50 a barrel mark.
This precipitous fall in the price of oil has caused conspiracy theorist to claim that the United States is secretly engineering markets to put pressure on our international enemies such as Venezuela, Russia, and Iran. Do I think that the United States is doing this? Yes, absolutely. But do I think this is a conspiracy? Hardly.
Exhibit A is the recent appointment of Department of the Treasury Under Secretary for Terrorism and Financial Intelligence, David S. Cohen, to the Number Two spot at the CIA (Deputy Director). The White House is not hiding anything about this guy. They say he administered anti-terrorism funding programs, particularly against ISIS, as well as sanctions against Iran and now Russia. Economic espionage is official government policy, and it does not seem to me that they are trying to hide that at all from anyone.
Oil producing countries, particularly the members of OPEC, have been using the price and quantity of oil as a foreign policy tool for decades. Exhibits B & C, the 1967 & 1973 Oil Embargoes, where Arab countries used their leverage in the energy market to place political pressure on the United States. The United States, too, has used oil as a political tool in the past. Many historians claim that Pearl Harbor was the result of Japan’s hand being forced by an Allied embargo on oil reaching Japan.
To return to the economic, not political, side of things, the market for oil is an oligopoly. There are a few large suppliers, and there are significant barriers to entry (primarily being that certain countries simply do not have the natural resource underneath them in the ground). More specifically, the market for oil resembles a Dominant Firm Oligopoly, with Saudi Arabia being the dominant firm. As the world’s largest producer of oil (13% of world production), it commands a great deal of pricing power – power that smaller “firms,” such as Venezuela, Ecuador, Nigeria, Iraq, Iran, Libya, and Qatar cannot match. So theoretically, Saudi Arabia could sell its oil at a lower price, and the other countries would have to lower their posted price, or else their clients would turn to Saudi Arabia, which has plenty of oil to supply if it wants to.
And that is exactly what Saudi Arabia is accused of doing, through an arrangement made with the United States (many people point to a meeting Secretary of State John Kerry had in Saudi Arabia back in September). The conspiracy theorists claim that Saudi Arabia is selling its oil at a lower-than-market rate by keeping productions levels too high relative to international demand in order to drive down the price of oil internationally, in an effort to put pressure on the governments of Iran, Syria, Russia, and Venezuela. These countries all conveniently happen to be enemies of the United States and Saudi Arabia, and they are all also conveniently highly-dependent on oil prices for government revenue and social pacification.
Saudi Arabia, from a purely economic point of view, has an incentive to cut production, which would send prices higher. Higher prices mean higher profits, which is better for their economy. Other oil producing nations feel the same way. However, the stars may have aligned this time for the US and Saudi Arabia to strike a deal and keep prices down. The US gets the assist of pressure on its enemies; and not just Russian and Iran. At the meeting between Kerry and the Saudis in September, the Saudis agreed to join the US coalition against the Islamic State. Saudi Arabia, on the other hand, may have bought itself support in its fight against the Assad regime in Syria, and the low prices will put pressure on producers in the United States and Canada, where it costs a lot more money to get the stuff out of the ground than it does in Saudi Arabia. Everyone at the table (a table set for two) gives a little and takes a little.
So do I think that the United States and Saudi Arabia are at least in part engineering the fall in oil prices for their own political motives? Yes, absolutely. But do I think that this is a conspiracy? Absolutely not. This is just business as usual for the United States, where an economist is going to be our Number Two Spy.
This is part three of a four-part series of posts on the Economics of Oil. Other posts:
Sorry that I have not posted in a while. I have been a bit busy and I recently came down with the flu. It is only fitting that this article is about disease. I’ve also got a climate change post in the works. I wanted to post it a few weeks ago when all eyes were on New York, so I guess I’ll just have to post it with a back-date now.
Two aspects of the Ebola case in Dallas bother me a lot. The first is that the patient went to the hospital with symptoms, told the hospital he had recently been in West Africa, and nevertheless he was turned away. I can’t know for sure, but I assume that the patient is uninsured, and the admitting nurse, who is instructed to turn away patients who are unlikely to be able to pay their hospital bills, simply saw the hospital’s finances as a greater danger than Ebola.
Because of this episode, the White House is considering establishing States-side Ebola screening in airports. However, people seem to be at a miss on how to implement this. They say that there are just too many airports and too few West African passengers. That’s the second aspect that bothers me a lot. It is fairly easy to identify which airports have the highest rate of passengers coming from Liberia, Guinea, and Sierra Leone. Here’s how:
I assume that the FAA has a database of all passengers coming and going from the US. If not Homeland Security, the airlines, or probably the NSA does. Gather this data and discard all trips that do not originate in West Africa. Then count up all the trips by the airport that they terminate in and convert this into a percentage. And there you have a crude estimate of the most likely entry points for Ebola into the United States of America. I’m assuming that JFK will be high on the list. Maybe Chicago, LA or San Francisco, and maybe Dallas and Miami will be high on the list as well.
Now that will only cover some of the possible passengers who could carry the virus. People could travel to an infected country on a different ticket, and then later come back to the United States. For instance, last year my friend went to West Africa for work, and on the way home he spent a few days in London. I assume that his Africa-London ticket and his London-US tickets were different. These would be harder to track because I don’t know if there is reliable data available on these trips. Maybe Homeland Security, the NSA, the FBI, or the CIA tracks these trips, but I think it would be difficult for even an economist at the CDC with security clearance to obtain this information. However, on landing cards for the US you are asked, “Countries Visited on this trip prior to US arrival.” Of course these are not digital, but it is possible that Homeland Security has some stats they can share. I won’t dive into how to process these stats, since we have no idea what form they could take.
Lastly, another way to capture the elusive passengers who visited West Africa on non-US terminal tickets is through a random sampling method. First, collect a list of all possible one-stop destinations from Liberia, Guinea, and Sierra Leone. I think that one stop is reasonable. There are very few non-stop flights from West Africa in general, but I think that two-stop flights may be casting the net a bit too wide. From this list, eliminate any flights that terminate in the US (those are already covered by the supposed-FAA data) and any flights that do not terminate in an airport with flights direct to the United States. From the FAA data, randomly select passengers departing from these airports to see what airports they are arriving to in the US. The random sampling could even be weighted, giving higher preference to more likely airports, such as those in Europe, and lower preference to less convenient flights, such as East Asia. Simply add this sampled data to the FAA-obtained data and you have a more complete, albeit less-than-perfect, picture.
The last obstacle is time-frame. Peoples’ flight patterns and behaviors have changed since many airlines have cancelled flights to West Africa. So this data should probably only be collected over a six month period or so. Otherwise we would be setting up screening centers in airports that are no longer seeing passengers coming from West Africa.
If these data are properly parsed and analyzed, the government would have a list of the most likely ports of entry for Ebola. With this information they could set up screening centers in a cost effective manner that interrupts and inconveniences air travel as little as possible.