3 Pages Posted: 30 Aug 2005
Date Written: August 20, 2005
In the international oil market, the producers are cartelized, whereas the buyers are fragmented. As standard economic analysis suggests, this results in a greater share of the surplus for the producers. The cost of exploration plus production for a barrel of oil to the producers is approximately $14, whereas the recent price is $65.
A buyers' cartel could be formed by the governments of the major oil importing countries like the U.S., Japan, Germany, China, India, France, South Korea etc. All oil sold in these countries would have to pass through the buyers' cartel. The buyers' cartel could negotiate a price with the oil exporting countries, say $20 a barrel (which should be a markup of 43% over costs). After purchasing oil from the producing countries, the buyers' cartel would release the oil in the market and let demand determine the price. If current demand conditions remain unchanged then the price would still remain at $65. However, this would reduce the effective price to the citizens of the importing countries to $20 a barrel as their governments would earn a profit of $45, which could be used to reduce taxes or pay for programs like Social Security. It would also reduce the trade deficit which is a long term risk to the value of the dollar and the US economy.
For the U.S. (which imports 12.7 million barrels a day) the savings would be $51 x 12.7 million x 365 = $236 billion a year.
Such a cartel would not be an inefficient interruption of free trade as Ricardo's arguments of specialization do not apply. A country cannot specialize in producing oil just because the price went up, it needs to have oil deposits. In any case the market price of oil is far beyond cost of exploration/production which indicates large rents being earned. A buyers' cartel would simply transfer the rents from the producers to the consumers. For the global economy the cartel would have the effect of a technological innovation that reduces costs, hence leading to greater efficiency and a rise in production. The rents currently being charged by producers increase costs of economic activity and create deadweight losses.
The buyers' cartel is also morally necessary as the rents (surplus) should belong to the consumers whose efforts led to the economic development that created the rents.
It would be expected that the governments of the producing nations would resist a buyers' cartel. At the very least the importing countries should be able to negotiate with them to share the surplus 50:50. With such an agreement the savings to the importing countries would be:
1) US $118 billion a year ( (1/2) x ($65 - $14) x 12.7 million x 365) 2) Japan $50 billion a year 3) China $27 billion a year 4) Germany $22 billion a year 5) South Korea $20 billion a year 6) France $18 billion a year 7) India $14 billion a year
(Note that the above numbers are only half of the surplus being currently appropriated by the producing countries.)
The increasing demand for oil by importing countries will keep increasing the surplus (rent). Economists from the investment bank Ixis-CIB predict that by 2015 the price of oil would reach $380 a barrel. Without a buyers' cartel that would result in an outflow of surplus of $1.6 trillion a year from the US (at current consumption levels).
Keywords: Oil, macroeconomics, public policy, economic theory, international trade
JEL Classification: A10, E60, E61, E62, E63, F10, F11, F13, F40, F41
Suggested Citation: Suggested Citation
Sen, Jayanta, Oil at $20 a Barrel and $200 Billion Savings a Year for the U.S.: Benefits to the U.S. from a Buyers' Cartel (August 20, 2005). Available at SSRN: https://ssrn.com/abstract=792304 or http://dx.doi.org/10.2139/ssrn.792304