Scott: Piece below from WT is typical of the bad economic reporting we get.
1. Saudis are making an implied threat to raise the price of oil. So we are subjected to an analogy to 1973 - hint:Saudis do not have the pricing power in 2003 that they did in 1973. More non-OPEC oil being produced. More plants capable of switching fuels. Fewer OPEC members who can afford to take even a VERY shortterm income hit so essentially the entire hit on production cuts to raise the price would be out of GCC. Further within GCC Saudi finances are bad enough that they couldn't take the hit for long. And of the other GCC only Kuwait produces enough to matter in a worldwide sense. So essentially Kuwait has to reward the US for getting Sadaam off its neck by vitually shutting down production. LOL. Kuwait has never met an OPEC quota they wouldn't blatantly cheat on. Kuwaiti cheating was one of Sadaam's reasons for invading in 1990 and one of the reasons that if Sadaam had stood down his mech forces after the invasion the Arab League was prepared to let the annexation stand.
2. Saudis DO have the power to kick oil to $35-40 range. Essentially they could force the US economy into a halt /downslide for 9-12 months. Whether their regime could survive the financial hit is another question.Whether they would feel safer with a Democrat in the White House is more to the point. Bush has coddled the Saudis since 911. The Bush family has longtime business contacts to Saudi. Despite the number of neocons in the current administration the'Jewish Party' in the US is the Democrats. A Democratic administration is likely to be far tougher on Saudi Al Q connections and religious extremism in general. It would certainly play well domestically.
3. The writer takes the Saudi whine at loss of buying power from dollar's fall. Hint - always reverse an arguement. Dollar had 30% appreciation against Euro. Most Muslim petroeconomies sell in dollars and buy the bulk of their imports in euros. Did any cut prices when faced with the prior windfall? Nope. LOL
4. The big dangers to world oil supplies aren't another OPEC price hike [mostly constrained by market forces / financial needs of OPEC members]. A Saudi implosion would be huge. Could happen. It is one of the world nightmare scenarios. Other major hits [orders of magnitude less but still major]
a. implosion in another major producer -Nigeria and Venezuela are on the brink. Iran, Algeria and Indonesia all have major domestic difficulties. Mexico is a volcano waiting to go bang.
b. Al Q targeting the oil infrastructure - Iraq has brought the war home to the Arabian peninsula. For two decades the oil people have bought off the crazies with a mixture of looking the other way on their external exploits and protection money. If this breaks down the whole Gulf could do offline and gasoline could be rationed military only...
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Weak dollar pitfalls
By Bruce Bartlett
One reason administrations fail is they often fall victim to the law of unintended consequences. The Bush administration discovered this when it imposed tariffs on imported steel last year to help U.S. steel producers. It forgot there are far more people working in steel-using industries than for producers. Steel users were harmed by the tariffs because their costs increased, leading to reduced sales and employment. After 18 months, the administration finally figured this out and eliminated the tariffs it should never have imposed in the first place.
Unfortunately, the Bush administration is in danger of making the same mistake with respect to the dollar. Having become obsessed with the trade deficit, it is looking for other ways to reduce imports and raise exports. One way is to reduce the value of the dollar on foreign exchange markets. A lower dollar makes imports more expensive and exports cheaper in terms of foreign currencies. When this happens naturally, economists view it as part of the free market's automatic adjustment mechanism for trade imbalances.
The problem is this is not taking place on its own, nor is it costless. The Treasury Department has been signaling for some time it would not be displeased if the dollar fell. This sort of "benign neglect" can be as effective as direct action in foreign currency markets, such as having the Treasury sell dollars. When currency traders know we won't defend our currency, they take advantage of it by selling dollars against other currencies. That is a key reason why the dollar has fallen sharply against the euro and is now at a record low.
Another effect of this weak dollar policy became evident in recent days when the OPEC oil cartel indicated it might raise prices to compensate for the falling dollar. It has always priced oil in dollars, so a fall in the dollar means its members have to pay more for goods and services purchased in Europe, Japan and elsewhere. Ali Naimi, the oil minister of Saudi Arabia, complained last Thursday that the dollar had fallen 35 percent in the last three years. He said OPEC would price oil to maintain "the purchasing power of the old, good dollar."
This is all very reminiscent of the early 1970s, when OPEC first raised the price of oil in response to a falling dollar. As early as 1970, it passed a resolution at its annual conference saying it would adjust the price of oil to reflect changes in real purchasing power. The following year, it passed a resolution complaining about "worldwide inflation and the ever-widening gap existing between the prices of capital and manufactured goods ... and those of petroleum." In other words, the prices of things OPEC countries imported were rising faster than the oil that they exported.
By 1973, OPEC had enough with U.S. inflation and it moved to sharply raise the price of oil. Although the war between Israel and Egypt precipitated the price rise, it couldn't have been sustained unless supported by fundamental economic forces. These same forces also pushed up prices for gold and other commodities. Basically, the 1973 OPEC oil price increase just kept the price of oil line with other commodities. It was more jarring only because of the circumstances in which it occurred and because it happened all at once.
Nevertheless, there are those who still believe OPEC caused the inflation of the 1970s, through some sort of "cost-push" mechanism. In truth, OPEC was responding to inflation, rather than causing it. The root cause was creation of too many dollars by the Federal Reserve. This came about because Presidents Lyndon Johnson and Richard Nixon cajoled the Fed into running an inflationary monetary policy to keep interest rates artificially low. They also removed many of the institutional constraints that prevented previous presidents from doing the same thing.
In short, the Fed, not OPEC, caused the stagflation of the 1970s. A recent paper by University of Michigan economists Robert Barsky and Lutz Kilian confirms this analysis. Writing in the prestigious NBER Macroeconomics Annual (2001), they conclude, "The Great Stagflation of the 1970s could have been avoided had the Fed not permitted major monetary expansions in the early 1970s. ... The stagflation observed in the 1970s is unlikely to have been caused by supply disturbances such as oil shocks."
Although the signs are nascent, indications are inflation is starting to show its ugly head again, the result of an extremely easy Fed policy over the last three years. Sensitive commodity prices like gold are up, the dollar is down and OPEC is again complaining about lost purchasing power. It's like deja vu all over again.
Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.
posted by scott 8:32 AM