TANZANITE, DIAMONDS, OIL, AFGEM, DE BEERS, OPEC AND MONOPOLY

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Oil and the world economy.  Crude oil is a raw material for a wide variety of products that underpin the economy of the developed countries of the world.  As a fuel it is used to generate electricity, fire boilers, melt metals and supply personal and commercial transport.  In the 1950s and 1960s the developed economies had become accustomed to cheap and plentiful of oil.  The sudden rise in price had an immediate and telling impact.  Although experts regularly predict that oil reserves will run out one day, today supply is rising faster than demand; as a result, in 1998 oil prices fell by nearly 50% to less than $ 6 a barrel.  In real terms this puts today’s price below that of the 1970s.  In response to the decline in prices and margins , merger mania has begun, with BP paying $33 billion to merge with Amoco and Exxon (Esso) paying  $82 bn to merge with Mobil.  In both cases, massive economies of scale are anticipated which will allow for considerable job cuts.  This has led Shell, who cannot find a suitable partner, to slash jobs in an attempt to remain cost competitive too.  However, without the benefits of the economies of scale of its rivals, Shell has to look at different ways of ensuring that such cuts do not damage its business.

One solution that it is pursuing is to reorganise and de-layer, that is, to remove all manner of middle management jobs that make up the layers of management in the Shell bureaucracy, including the complete dismantling of some regional centres.  In addition, continued asset sales are likely, particularly in the weakest non-core activities.  Unable to find a merger partner, Shell had made arrangements to combine certain operations with Texaco and benefit from economies of scale in that way.  However, this fell apart when agreement on the division of the spoils could not be reached.  The merger between Exxon and Mobil is the biggest in history, forming a company valued at around $250bn (or in other words a quarter of a trillion dollars), with 123,000 employees producing around 2.5 million barrels of oil a day.  The low price of oil is also likely to have an effect on investment by this industry.  The problem is that for many firms $12 dollars a barrel is the minimum price below which further exploration in the North Sea becomes unjustifiable, since it costs about $11 to get the stuff out of the ground.

Oil prices are not, however, determined entirely by how much is dug up; you will have found little change in the price you pay for petrol in 1998 despite the massive price falls, since over 80% of the big suppliers are reluctant to cut retail prices.  Also, demand is not static.  A cold winter will alleviate the problems, while a mild one will exacerbate them.  But most of all it depends on what the members of the Organisation of Petroleum Exporting Countries (OPEC) Cartel do, for in recent years there has been little cooperation amongst oil exporting nations.  However, since ultimately the economic fate of whole nations depends on it, price falls are likely to concentrate minds considerably.  When oil prices went up dramatically in the 1970s, demand management hit a crisis.  Because oil is used to make petrol, plastics and a lot more besides, if it goes up in price all firms costs go up too, therefore aggregate supply shifts left.

The result is more inflation and recession:  At the time we had got used to the idea that if demand goes up too much or down too much we get either inflation or recession, but in this case we got both.  This became known as stagflation as it involves economic stagnation and inflation.  In such circumstances, aggregate demand cannot be managed to reduce inflation and increase output, since raising it will add to inflation while reducing it will cure the inflation but make the decline in output worse. The possibility of such a ‘policy dilemma’ was first considered in detail by Tinbergen (1952), who realised that one tool cannot be relied on to do two jobs.  The problem is that as nation we are poorer, because we are giving more to oil exporting countries (which, prior to the discovery of North Sea oil, did not include us).  The question then is simply one of how to share out the misery.  The Keynesian response was have an ‘incomes policy’ that, by forcing wages to rise slower than prices, would make everyone a little poorer.  This, they felt, was better than letting anyone group of firms or workers bear all the burden, particularly as it tends to be new firms and unskilled workers who would otherwise bear the brunt of any such changes.

However, the incomes that the government has most control over are those in the public sector, so in effect this policy put the onus of adjustments on them.  Given that for the most part they are poorly paid, their reluctance to be used in this way was understandable.  On the other hand , from a Keynesian government’s perspective it is difficult to see what else could have been done and so, with right on both sides, the government and the public sector workers collided in a series of bitter disputes that culminated in the ‘winter of discontent.’  An alternative was suggested by a group called monetarists led by Milton Friedman (1912-) who argued that reducing the money supply would reduce demand in such a way that the effect on employment would be minimal.  But when in 1979 the new Conservative government, led by Margaret Thatcher, adopted their policies, they resulted in the first recession since the war, which decimated manufacturing and increased unemployment dramatically.  This in no doubt led to the clearing of some dead wood but the scale of decimation of the manufacturing sector suggests that it destroyed a lot of efficient firms too and ruined the career prospects of a generation of school leavers.  So deep was this recession that the following upturn was slow to materialise and eventually developed a momentum that surprised those in office in the late 1980s, which may have contributed to the depth of the subsequent recession in the early 1990s.

On the other hand, there was a strand in the policies of successive Thatcher governments that outlived any adherence to money supply targets and the like, which can be summarised by the term ‘supply –side policies.’  The reason that diamonds originally commanded a high price was that they were both desirable and scarce.  Today they still command high prices, not because they are scarce but because their supply is controlled by a cartel.  At the heart of a cartel is De Beers, whose mines produce half the world’s diamonds and who control 70 % of the world supply of top quality diamonds.  De Beers spends around $200m a year on advertising to remind people of the desirability and exclusivity of their products.  There are producers who, while benefiting from the high prices in this industry, would nonetheless like to sell more at slightly lower prices.

However, they tend to be kept in check by the knowledge that not only does De Beers control over half the mines, but those that it controls include the least cost ones, which puts De Beers in a position to win any price wars.  In addition, De Beers is actively acquiring other suppliers and wooing African nations to capture their diamond – producing facilities.  This is not to say that its position is inviolate, however; new mines with lower extraction costs no doubt were waited to be discovered and world supply exceeds world demand so that unsold stocks are growing.  In addition, the expected slowdown in world growth as we enter the new millennium could reduce demand and margins further.  In response to the fact that the abundance of diamonds will one day under-mine all attempts to keep its prices up, De Beers is attempting to differentiate its product in an attempt to corner the top quality end of the market.  It hopes to achieve this by laser etching the De Beers logo on to each and every diamond it sells and giving each an individual serial number.  This means that even if both the first reason for the high price of diamonds (scarcity) and the second reason monopoly power are gone, a third reason why some diamonds at least will command a higher price will remain (the quality of leading brand name).

The monopolist does not does not take the price given by the market it is a price maker rather than a price taker; it has market power and as long as there are barriers to entry like patents, brand loyalty and laws that keep other firms out, it will retain that power.  This means that it can make super normal profits in the short run and in the long run too and to show what happens in the long run since the answer may be that nothing changes.  For a monopolist the primary aim must therefore be to maintain the barriers and keep its privileged position in the business environment.  It can at the same time use the profits it makes to finance expansion in new directions, for as Penrose (1958) argued, the business environment does not dictate an optimum equilibrium size for firms since they can always move into different markets.  We cannot say for example, that a regional water monopoly cannot grow faster than the growth of water demand in its region, since it can use its super normal profits to expand into electricity and gas supply, indeed into anything it wants.  This means that in effect, customers are being exploited as the price they pay exceeds the cost of providing it.  There is, in addition, no incentive for monopolists to minimise costs and firms with a lot of market power are notorious for their x-inefficiency; their lavish buildings and generally lax attitude to cost control.  Clearly perfect competition has certain benefits for consumers since they are not exploited and costs are minimised     (allocative and productive efficiency).  This is one of the reasons why competition is thought to be desirable by a broad spectrum of political opinion.

A cartel is a highly organised formal arrangement to fix prices.  Cartels are generally illegal in the UK, Europe and the USA, but are accepted, even encouraged in some countries.  The problem that cartels face is that once everyone agrees on the price, any one firm can make even more money by secretly selling the product slightly cheaper.  So, while the firms welcome the high prices, the restricted supply necessary to keep the prices up means that each firm has an incentive to cheat.  This means that the cartel has to be well organised and have sanctions to deter firms from breaking the agreement, otherwise they tend to breakdown into price wars, until every firm remembers how damaging that is and the cartel re-forms.  Although cartels are largely outlawed in the UK, there are nonetheless arrangements that are permitted that are akin to cartel behaviour.  For example, there is a system of recommended retail prices that electrical goods manufacturers set for their products, which if undercut by a retailer, will lead to their being blacklisted by all the manufacturers.  Certain similar arrangements are also common in the car manufacturing business.

Production in Nigeria remains constrained due to ethnic unrest in the Niger Delta.  The volume of production currently disrupted is estimated at around 200,000 barrels per day, with production at 2.0 million barrels per day, compared to 2.2 million barrels per day in February 2003.  EIA’s current outlook assumes that Nigerian production could return to February levels in July.  However, the potential remains for further unrest that could affect Nigeria’s oil production.  Nigeria blue collar oil workers union, the National Union of Petroleum and Natural Gas , or Nupeng, said that it would strike if the government hiked the price of petroleum products such as gasoline.  President Olusegun Obasanjo, inaugurated for a new four year term, has said that oil product prices will be raised to make them comparable with prices in other parts of West Africa.  Major world crude oils important for oil pricing called benchmark or marker crudes are traded on international exchanges.  West Texas Intermediate (WTI), the main marker crude for the United States, is traded on the New York Mercantile Exchange (NYMEX).  The Organization of Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, in September 1960, to unify and coordinate members of petroleum policies.  OPEC members national oil ministers meet regularly to discuss prices and, since 1982, to set crude oil production quotas.  Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.  Between 1960 and 1975, the Organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969) and Nigeria (1971).  Ecuador and Gabon were members of OPEC, but Ecuador withdrew in December 1992 and Gabon followed suit in January 1995.  EIA estimates the current eleven OPEC members account for roughly 40% of world oil production and about 77% of the world’s proven oil reserves.  A lot has been made of how OPEC is responsible for the high prices in fuel.  The fact is that the oil producing and exporting countries are not a monopoly as it is usually alleged.  These countries, mostly from Africa, Middle East and Latin America control only 40% of the world oil exports.  The prices they charge for crude oil is relatively compared to the prices charged by the oil monopolies for the refined product.

First, the American and British oil companies have more control of the oil resources than the Governments in the OPEC group.  America oil multinationals such as Exxon Mobil, Chevron and Texaco together with the British companies such Royal/Dutch and British Petroleum control the oil market in many ways.  They buy crude oil at low prices and sell at high prices.  For example, Nigeria sells oil to Shell and other companies at about $9.  These companies fetch $28 at the world market price.  While these companies are involved in oil price fixing at the retail level, various governments also benefit by putting taxes on the products.  Then they turn around and blame OPEC.  Threats to the principle of a nations sovereignty over its hydrocarbons resources.  The dominant subject affecting the oil market throughout the last months has been the war in Iraq.  Fears in the Middle East are at a high level as uncertainty grows about the region’s future unrest, which is dominating people’s minds.  Caught between how to best appease Washington without angering their own populations, oil producers in OPEC seem to have chosen a magic formula: ‘the payment of a silent tribute!’  OPEC’s Quota violation makes things quite easy for the US- led international energy agency to neutralise possible supply shortages in war times.  Iraqi crude oil exports have not yet resumed resulting in a gross Middle Eastern oil supply disruption of around 1.9 million barrels per day.  By the first week of June, most of Nigeria’s oil production had returned to pre disruption levels, as had Venezuelan production.  OPEC has an estimated 1.4 to 1.9 million barrels per day of spare production capacity to guard against any further supply problems that could rise.  On May 22nd, the United Nations Security Council adopted Resolution 1483, which lifted civilian sanctions on Iraq and ended monitoring of crude oil and petroleum product exports by the UN, which has overseen Iraqi oil exports since April 14 1995.  BP benefits from Iraqi oil delays.  The continued failure by America and Britain to get Iraqi oil exports back on track will help BP report very strong second quarter figures and puts the oil firm on track for a near 35% increase in annual profits.

Fuelling wars:  Rough diamonds and Crude caches have often been used by rebel forces to finance arms purchases and other illegal activities.  Neighbouring and other countries can be used as trading and transit grounds for illicit diamonds and crude.  Once diamond and crude are brought to the market, their origin is difficult to trace and polished or refined, they can be no longer identified.

The novelist and film writer Hanif Kureishi accused the fascistic Corporate Style Mc Labour party of silencing the voices of Britain.  The novelist said artists must search out silences in society and speak out.  After the raptulous reception in Cannes for his new film the mother, Kureish used the Raymond Williams lecture at the Hay Festival to highlight the stifling of self expression in multi cultural Britain.  Kureishi told the Guardian: ‘The Labour party is a corporation like Adidas or any other brand.  The idea that you vote for them and control them and that they are any different to Adidas, Nike or McDonalds is absurd.  They are McLabour.  Somehow, some of us continue to believe that they speak for us but they cannot be and they do not.  How much opposition was there within Labour to the war in Iraq? It didn’t make the slightest bit of difference.  In those terms it is not a democracy at all.  Echoing the concerns of other Hay speakers as the novelist Margaret Atwood, Kureishi likened to global companies to fascist political parties.  How much more of these intellectual gymnastic routines?  The fear within many governments is of harming the profit margins of these companies and their shareholders.  They do want to forget the past they hoped would never come to haunt them. And pretend they never benefited from apartheid to racism.  He said the solution for writers, artists and the public was top be aware of where silences lay in societies, such as the child abuse kept quiet by the Catholic Church and the current abuse of Asylum Seekers.  The Bromley born writer said Asylum Seekers were being turned into victims and objects and profoundly ‘de humanised’ by the language used about them by David Blunkett and racists.  He felt racism in Britain was alive and well.  Overt racism is not allowed, but the focus has changed.  When I was a kid, you talked about immigrants or Pakis.  Now its asylum seekers or you refer to all Muslims as Terrorists.  The language has altered but the feelings are still the same.

Texas values are the new global menace.  The Bush administration is a threat to international security because the president comes from Texas.  I believe that Mr Bush and his hillybilly image is quite fair.  Texas is a society built on cotton plantations, a toxic by product of the rigid segregation of low waged, low skilled workers dominated by a deeply religious oligarchy of rich white families. Taking strength from slavery.  A radio 4 show called Raising Ham, presented by Constance St’ Louis, looked at black mothers bringing up sons in Britain.  One interesting point made was that African Carribean boys felt displaced from Africa because of slavery and from the Carribean because of migration from the islands.  West African boys, it seemed did not feel sense of displacement and had a stronger sense of identity.  Looking back to when I was growing up, I now realise I developed my pride and my confidence by doing and thinking in the same way that my slave ancestors did.  I found the answer to succeeding in modern Britain not by ignoring slavery or God forbid justifying it.  I found it by reading, observing and understanding how those great people turned evil into good, made plenty from little and created a new culture right under the noses of their slave masters.  I realised that if people suffering from the cruellest of conditions could redeem themselves from slavery, people like myself shouldn’t be ashamed of our displacement from Africa.  The slave experience from those people who feel history and racism has left them rootless.  Michael Lind said that Mr Bush’s values are those of Southern Conservatism-‘extremely pro-military, suspicious of diplomatic and international organisations and deeply religious in the fundamental sense.  He argued that Southern Conservatism was a menace to the prosperity and security of the world as much of that of the U.S.  The world supported the U.S immediately after September 11th  and Bush squandered on that repeatedly and unnecessarily by his belligerent approach.  American literally legend Don Delillo laboured for half an hour to avoid being drawn on his politics, at one point asking an audience member to answer a question on Tony Blair and Iraq rather than add his view to the bubbling cauldron!  But the Canadian novelist Margaret Atwood did not shrink from comment.  She said of U.S. politics:  Power Corrupts and Absolute Power Corrupts Absolutely.  She said democracy is the hardest form of Government to maintain.  She said U.S politicians had strayed from the ideal that religion and politics should be kept separate and individual freedoms are being encroached upon.  Mr Blair opened a forum at Lancaster House on Tuesday 17th of June.  It would have been easy to dismiss the gathering at Lancaster House as a PR stunt.  Rarely have so many ministers and oil and mining industry executives rubbed shoulders.  What did they want?  To be on the side of the angels ?  To show they were four square behind Mr Blair’s fight to end corruption- at- least in relation to oil, mining and developed countries.  They suggest oil corrupts and impoverishes rather than improves developing nations and their record in places such as Nigeria implies there is a lot of truth in this.

When a nation is headed by a person whose economic game plan favours the rich, laws may be reinterpreted in sense counter to their own writing and propagandized in such a way that the top guy sees fit.

ECONOMICS AND THE ROAD MAP TO PEACE.  Without proper controls economic abuses too often arise from simple avarice and human frailties.  Such cases usually give rise to economic feudalism where, powerful companies squeeze out all rivals and form monopolies and cartels.  De Beers (diamonds) and OPEC (oil) are perhaps the best known examples from our own age.  The Pharmaceutical industry.  Doctors who up to a point tend to recommend the best products regardless of cost prescribe many drugs in the UK.  Dominated by a few big players.  Access to customers is important, especially large chemist chains such as Boots and the NHS hospital trusts.  It is currently very profitable for those with big selling drugs.  Access to customers is likely to remain important considering the AIDS problem.  A charge of genocide against black people is to be laid against the UK government in a petition to the United Nations.  The Black United Front Parliament (BUFP) will submit the petition on international Human Rights Day on December 10.  These include failing black youths through the education system, unemployment, the expanding prison and psychiatric system.  The pharmaceutical industry has an arrangement with the government that ensures that prices paid give firms a return of around 20% in order to encourage them to come up with and supply new products to the NHS.  Combined this means inelastic demand and high prices.  However, doctors are becoming increasingly cost conscious owing to government reforms and growth in distribution by agents who buy in bulk rather than by the individual chemists.  Microsoft is giving all these a good run for their money; it controls more of its market than does OPEC and has the explicit blessing of the current U.S administration.  Monopoly is power.  You either buy from the Monopolist or you don’t get.  Monopolies and cartels are bad also for democracy and good for motivating terrorists as they enlarge the gap between the haves and have nots almost without bound.  In a monopoly, the quantity of a good produced is often less than the socially desirable level of production.  There has been a misallocation of resources not enough resources are being used where they should be and other resources are being underutilised.  It is for these reasons that monopolies are seen as inefficient as they also encourage institutionalised racism.

Betrayed…   Our troops are being led by a poodle.  While oily politicians smooth civil servants and fat hacks fight for their political careers in London, in Iraq, our troops are fighting for their lives.  While they play their interminable word games in front of the Hutton inquiry, all desperate to save their worthless skins, in Iraq our soldiers are being slaughtered.  While the public are being bored to what feels like death by the Hutton inquiry, in Basra our warriors are experiencing the real thing.  What is the very worst that can happen to the people sitting in front of Hutton?  A lost job?  A cushy posting abruptly terminated? Being asked to fall on your sword Mr Hoon?  Don’t make me laugh.  Put aside the Dr Kelly affair for the moment and consider the reasons of why we went to war.  Today it is 137 days gone and there is still no evidence of weapons of mass destruction.  In Iraq, our troops are being blown to pieces and nobody gives a damn.  Of course they are lying.  The question of U>S –Russia oil relations is a core issue given the assymentry of power, long term oil supply availability, both from other countries and the U.S itself and oil supply security are fundamental considerations.  President Bush and President Putin, for example, have already met in Texaco to discuss energy cooperation.  No matter how much U.S-Russia oil relations are growing in importance, the reality is that Middle East oil remains King.  Then there is the issue of calling each other terrorists.  Now is the right time for the people of Iraq to heal their own wounds.  It is time to bring our troops back.  If we get out now, then there is a chance that the Middle Eastern region might one day have fond memories of the British.  Does Blair have the guts top tell Bush that enough is enough?  That is the answered question about Antony Blair.

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