I do not see that the current tussle of oil producers indicates that the market is broken. Suboptimal, sure, but not broken. My 2c.
See also: rideshare. VC pumps in billions so that Lyft & Uber can be cheaper than taxis at a HUGE loss -> taxis go out of business -> Lyft & Uber jack up their prices because they own the market.
Did the rideshare companies actually jack up their prices at any point? How would they do that when they're still in competition with each other and the barrier to entry to the market remains low? Any attempt to raise prices would immediately result in more competitors.
That was the whole thing with the taxi medallions. It was a cartel, because that market has very low barriers to entry and the taxi companies didn't want the competition.
Uber didn't make prices artificially low, they just provided competition which stopped them from being artificially high. They're not losing money on rides, they're "losing money" on self-driving car R&D and things like that.
And "fair trade" is a marketing device. People want to feel good about not exploiting people, so companies not exploiting people get to charge a premium for that. That doesn't mean companies who are paying suppliers less don't still exist or offer similar products for lower prices purchased by customers who don't care as much about that.
Neither of these are examples of what you're describing.
How is that even possible? They get a percentage of the fare and their unit cost is only a tiny bit of server utilization.
Plus marketing. You think Google let Uber put an advert on every Google Maps search for free?
There's actually a whole article about it on crunchbase: https://news.crunchbase.com/news/understanding-uber-loses-mo...
The American VC system is disgusting. It allows a few wealthy individuals to choose winners not because they are the best solution, but just because through nefarious tactics they are the last ones standing.
This is nonsense logic and the very reason not to use cash-based accounting for anything serious.
They raised capital, therefore they have the money. Basically all companies start off "losing money" because most investments don't instantaneously produce their full return. How would anybody ever open a factory or a restaurant if they had to be profitable before spending any money on anything that generates profit? You can't use the profit from making widgets to build your first widget factory because you need a widget factory to make widgets.
Right, and as a result of this, the companies that have capital can always beat out the ones that don't. Who gets to decide which companies get capital? VCs. So that means that it's not the market that decides who wins and loses, it's VCs. Does that sound like the intention of capitalism to you?
Having a better or more efficient idea is meaningless in today's economy. All that matters is how big your warchest is, and how many rich investors you have in your pocket.
If your idea requires capital to execute and you don't have any then you can't execute it. How do you propose to change that?
> Who gets to decide which companies get capital? VCs. So that means that it's not the market that decides who wins and loses, it's VCs.
Who gets to decide which companies get capital? Venture capitalists. In other words, people with capital are the ones who decide which companies get capital. This is almost tautologically true.
But that is the market. The VCs fund the companies they think have the most promise. If you have a good idea but not capital then you convince some people with capital to fund you so you can execute it. That's what VC is.
What are you proposing as an alternative? One where raising capital is impossible and so you were either born with it or you're stuck working hand to mouth at a McJob forever because your idea takes more funding to execute that you can save in a lifetime as a wage slave?
Medallians only apply to NYC. Cities have been hit hard (portland, austin). But to be fair, it caused Radio Cab to modernize with an app.
Profitabilty: Here, I did your research for you, not too hard:
https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-...
https://www.latimes.com/business/hiltzik/la-fi-hiltzik-lyft-...
Please take at least one second to google next time?
Fair Trade absolutely has an impact, by your own admission! You are applying the "if you can't fix everything don't bother fixing anything" fallacy. I don't know why certain personality types have to hide behind this when someone is trying to do something good. Do you just hate yourself?
So you have no evidence that they'll raise prices and the claim that they would is pure speculation. Which still doesn't explain how they would be able to when they still have to compete with each other and when the barrier to entry is very low such that if they ever did they would quickly get new competitors.
> Profitabilty: Here, I did your research for you, not too hard
Websites explaining why they currently spend more than they take in (answer: long-term investments like R&D and advertising), not how they would lose money on the average ride.
> Fair Trade absolutely has an impact, by your own admission! You are applying the "if you can't fix everything don't bother fixing anything" fallacy.
I never claimed it doesn't do anything. It's just not an example of dumping or anti-competitive behavior. Non-fair trade coffee isn't excluded from the market in any way. The higher price for fair trade coffee doesn't come from market power, it comes from marketing and selling a different product (a specific brand of morality) which is worth more money to some customers.
There is no cartel there. There is nobody stopping anybody new from paying higher wages and marketing their coffee as such, nor from paying lower wages and charging lower prices.
If that’s all “fair trade” is, that’s an impressive marketing tactic.
For a long time that marginal cost was Canadian oil sands oil, which cost about $40 a bbl to extract and $10 to ship. The Saudis who can produce at $10 a bbl were making money hand over fist.
That's not what "monopoly" means. Monopoly power isn't just a fancier word for market power. Monopoly power is power derived from the fact that nobody else is selling what you're selling.
Note that in this example, the Saudis can't raise the price of oil above $50 / barrel. Setting a price of $60 would send their sales to 0 rather than to whatever the level of demand is at $60. They can't do it because they don't have monopoly power.
(If you expand the example a little, saying that world oil demand exceeds the amount Canada can produce, then you can claim that Saudi Arabia has monopoly power by virtue of being able to sell oil that Canada can't sell. But in the model where Canada can produce any amount of oil at $50 / barrel and Arabia can produce any amount at $20 / barrel, there is no monopoly power anywhere.)
Policymakers may; they'll agree with most definitions of a Bad Thing.
Economists have to be more careful. Saying Saudi Arabia has monopoly power in the oil market because it produces oil at a lower cost than other suppliers is crazy. What power they have to manipulate the market doesn't come from what they're already doing -- it comes from what they could do. They have a marginal cost of production which is below the current market price. The fact that their average cost of production is below the current market price is not relevant.
Consider a world where Arabia, Canada, Russia, and Venezuela all produce oil and sell it at the world price of $50 / barrel. In this world, Arabia's strategy is "pump all the oil we can sell at a profit". They have a marginal cost of production of $70 / barrel, above the market price, and an average cost of production of $20 / barrel, well below the market price. They're making money hand over fist.
No one considers them to have monopoly power here. What would it mean? How would they exercise it?
See e.g. The Concept of Monopoly and the Measurement of Monopoly Power ( https://sci-hub.tw/https://link.springer.com/chapter/10.1007... ), which would define Arabia's monopoly power in the hypothetical I've described as, on a scale from 0 to 1, negative 0.4.
But again, profits are determined by average cost, not marginal cost. There is no reason to expect average cost to equal marginal cost.
In what world would any company make zero profits in a "perfect" sense?
Companies exist to make profit...
https://www.investopedia.com/ask/answers/033015/what-differe...
Where does this conclusion come from?
I would intuitively define a free market, as a (virtual) place, where people can trade freely (goods or labour) without restrictions. And they profit, if they are better off with the trade, than without. The more free the market, the less restrictions.
Why so complicated?
But this is not reality. I doubt doing abstractions like these are helpful in understanding anything, when the base is so far off.
"In a perfect free market the oil producers make zero profits"
where this statement does not make sense, unless you apply weird economic definitions.
Profit is market inefficiency, whether due to missing information or inadequate competition. Perfect efficiency drives prices down to the marginal cost of a good or service. Micro 101 stuff.
No profit = no motive.
"perfect efficiency" means "no market" in this definition. It's a make believe process that will literally never happen. Companies that work with perfect efficiency close their doors.
These economic models are simplistic to the point of stupidity. But motivation to do the work can be totally priced in to the equations as a cost of doing business. Profit beyond that is what must, in the models, end up at zero to be efficient.
Individuals won't put up millions or billions to start large companies without a reason.
"models" remove human motivations and will never be realistic.
It's why Socialism and Communism are perfect on paper... but fail spectacularly in real life.
So I wouldn't say that the oil market is broken, as much as it has never really worked as a close-to-ideal market.
Given these prices, shale oil and tar sands production is going to shut down at some point. This is good news in a way, because these are among the dirtiest sources of oil in terms of environmental impact. Saudi Arabia extracts "light" oil and it's a frickin' desert, so the environmental impact of that extraction is quite a bit lower all things considered.
Beaver fur doesn't have much economic relevance today--indeed, even the Hudson's Bay Company ceased fur trading decades ago--but the United States and what is now Canada are much better off having exploited that resource for profit while they could.
Wait, what? A desert is just as much an ecosystem as a rainforest or a city.
Sure I guess technically anything is an ecosystem, but some clearly support far more life (and variety of life, and sometimes exclusive life) than others. They obviously have different ecological "value".
Also pumping oil in the desert doesn't lead to the local residents being able to set their tap water on fire, you know, the way fracking can.
Which would be bad for energy independence and in the end give more price control back to OPEC.
After all that time Saudia Arabia now lets the price rise. How much time will it be over $30 before the shale producers start up again? Will it really pay off compared to the amount of time they had to spend with it under $30? And say they keep it _just_ over $30 - just how much over $30 can they go and for how long?
It seems like in the long run you'd better be prepared to keep it not much over $30 if you want to keep the shale producers out for good. That the idea of "put them out of business and then double the price" won't really work in a practical manner.
I'm failing to think of an example where this did work. Diamonds? I thought that the producers either bought or colluded to create an effective monopoly. That would be like S.A. just buying producers. That doesn't seem practical but who knows -maybe it is.
The oil industry is like one of those organisms that evolved to thrive in an intertidal zone, or in a region with random lengthy droughts. The industry knows how to shed or calcify all the parts of itself it doesn’t need in lean times and then rapidly redeploy those parts as soon as the environment changes, because this sort of thing happens over and over and over. Sometimes the thing the industry doesn’t need it and therefor sheds is “workers” and that’s a shame, but so it goes.
I'd only add that the above is also the reason that the Saudi gambit to put competitors out of business is highly unlikely to work. These competitors will just sit it out until favorable environments come back around. I'm not sure what the Saudis aim to achieve? But to achieve what people are speculating that they want to achieve, they need to have something else up their sleeves. Because a temporary low price barrage alone is not gonna do it.
Maybe they are thinking about low prices forever? Not really sure. But they must have some kind of additional plans since they should definitely know everything everyone else in the industry knows.
So what is the Saudi endgame? Keep prices low for an additional year after the global economy recovers from covid-19? (Which covid-19 recovery, in and of itself, could take a year?)
It just doesn't make sense unless they have some other weapon in their arsenal here. Which they might? I just don't know what it is. (But if anyone does they could make a billion right now trading.)
Related: Biologically Inspired Design:
> Center for Biologically Inspired Design at Georgia Tech: http://www.cbid.gatech.edu/
— I thought US shale break-even is between $45 and $55, is that correct?
— What's your opinion on how long until the debt starts imploding with the US shale producers?
Cheers, S
US shale producers have already started imploding, you can see it in the stock prices and the cessation of drilling.
Well, then you haven't paid any attention because that isn't the strategy. The strategy is to force them to become members of the cartel or you risk taking losses every decade. Those losses aren't high enough to drive out competition but they are high enough to make cooperation appealing.
I think that depends on how expensive it is to "start up again." If it costs $10mil to turn the taps on, then it won't be economic to do so unless the operators expect oil prices to stay above the $30 level long enough to make up the startup cost in operating profit.
From that perspective, an oil cartel could keep unconventional oil out of the market by holding out a credible threat that they'll crash the prices if ever unconventional oil becomes too big.
If the price drops and shale producers don’t have the capital to whether the storm then they don’t have much of a choice. Sure later they could come back when prices are high again, but in practice that’s probably hard and takes time.