Tuesday:  "Beneath" Yergin's history

1.  "Petrol states" as "rentier states"

  a. The owner of a natural resource can be viewed from an economic perspective as wishing to extract rents from anyone who wishes to use the resource.  (Petroleum is a non-renewable resource; in a  few weeks we'll address water as a resource -- in different circumstances it may be said to be renewable or non-renewable or partially-renewable (viz., many large aquifers).)  Of course, when we consume petroleum, there is less left in the ground, so the analogy with renting is imperfect.  When someone firm wishes to acquire petroleum resources, it typically leases (viz., rents) the rights to a deposit of petroleum.  Firms may also lease the right to explore for petroleum where none is known to exist, and they typically couple the right to explore with the right to pump and sell the petroleum which may be discovered.

    b. The analogy of a landlord who rents us an apartment is useful, but like all analogies limited.  What does a landlord wish from a renter?  Would the owner of a petroleum deposit wish  the same from anyone who wishes to drill her oil?  Very likely you, not the landlord, furnish your apartment.  You can take the furnishings with you when you leave.  How about a oil producing company which "rents" a deposit?  Commerical development of a field of petroleum generally requires investment in drilling rigs, pumps, pipes, etc.  Terminals by which the oil can be transferred to ships or trains can be very expensive.  It is often economically attractive to locate refineries and other industries which consume vast amounts of petroleum as close to the point of extraction as possible.  This minimizes transport cost for crude oil.

We read in Yergin's history how petroleum producers -- first companies, then states -- sought to create cartels to (a) avoid the pattern of boom and bust and (b) raise prices to consumers.

    c. Cartels of would-be renters are different in key respects from cartels of landlords.  Take this comparison into the realm of petroleum.  Note that recognition of just who "owned" petroleum in the ground was long contested between companies and countries.  Once a more or less international consensus emerged that all states own the natural resources within their borders emerged, the bargaining leverage of the owners increased relative to that of the renters.

    d.  Repeatedly cartels of "renters" were undone by the entrance of new, would-be renters who offered higher rents to get into the business of refining and selling oil.  How about cartels of "owners"?  Key on this question when we discuss the origin, history, and operating mode of OPEC (and OAPEC).  Note that, with regard to petroleum history, both renters and owners were burdened with political objectives that often overrode their economic incentives.  So the analogy of landlord and tenant breaks down. 

Just as the market for oil is not determined solely (or, in the short run, even chiefly) primarily by the economics of supply and demand, so the motivations of both buyers and sellers combine both economic and political objectives.  Oil is unusual in the degree to which political factors affect price, but it is not unique.  Consider commodities such as gold, and 'strategic minerals.'  Governments sometimes seek self-sufficiency of food just as they might "energy independence." 

If this were an Economics class, we would investigate all aspects of Petroleum markets:

Owned supplies.  We refine oil that we own in the ground.

Contracts.  We make contracts (legally enforceable promises) to buy or sell amounts of petroleum at a specified price over a fixed duration.

Spot market.  We buy or sell oil that is "in stock" somewhere.  It may be in a ship, a storage tank, or even a pipeline.

Future markets.  Someone makes a promise to deliver oil to us at a fixed price at some fixed future time (usually one month);  or we promise to deliver oil, that we do not now possess, to someone at a fixed price at a fixed future time.  Futures markets are often used to hedge against price changes.  They are also a favorite market for speculators.  ...And a favorite target for market manipulators. 

2. Futures:  As a means to hedge against a risky future, as a predictor of the movement of the price of a commodity, as a vehicle for speculation

One can write a futures contract for almost anything!  Commodity, such as gold or oil; equity such as Microsoft; stock index such as Dow Jones Index

What are 'futures' (a prominent form of 'derivative') and why do people use them?

Basics: http://www.investopedia.com/university/futures/futures2.asp, then http://www.rma.usda.gov/pubs/rme/fsh_7.html

Dynamic information flow: http://futures.tradingcharts.com/marketquotes/index.php3?market=CL

      thru the day, watch

3.  By the end of next meeting, firms should have written a crystal clear statement of the Terms of Reference.  Achieving that is a major step forward.