March 05, 2008

A Nobel prize-winner should not make such a statement

Sir Joseph Stiglitz and Linda Bilmes while defending their book The Three Trillion Dollar War (that I have not yet read) March 5 from some comments made by Tunku Varadarajan on March 3 say with respect to the price of oil “we attribute only $5-$10 to the war” and this is just a plain wrong statement, from a pure economic point of view.

All the terrain between the marginal extraction cost of oil and its market price is complete no mans land and so no one, not even a Nobel prize-winner, could therefore attribute any of it to any specific condition. If there is just one barrel of deficit in the supply, speculation and desperation could lead to any price; just like one barrel of surplus could start a movement towards equating the price of oil to its marginal cost.

That is why less than 9 years ago pundits predicted $5 per barrel of oil with the same ease other predicts $100 or more. That is why there is the extreme volatility in oil that wets the appetite of so many speculators. That is why it is impossible for me to understand why producers and consumers have yet not entered into long term production and take up contracts that could benefit them both.