CB -
...Vis-a-vis the current recession, I think you can make a very good argument that a significant cause is the rise in the price of energy, e.g., crude oil was around $15 a barrel at the beginning of 1999, and more than doubled by mid-2000. That's not due to the free market - crude oil prices are set by a cartel....
Sorry, I can't let that one slip by.
Yes, crude oil is not a free market, but even government-sponsored monopolies cannot unilaterally set actual prices and, in any case, the question is what determines exactly what price they decide to try to set.
First of all, prices are determined at the margin, so it is likely that one reason for the price increase is that non-OPEC producers found it in their interest to produce less at higher prices.
All suppliers, competitive or monopoly, attempt to maximize profits or minimize losses. In the short run, the pricing of already produced goods is largely determined by estimating the structure of demand and trying to maximize revenue. This is equivalent to saying that prices are set as high, but no higher, as is required to face an elastic demand above. This means that any further price increases will reduce total revenue.
Thus it is really demand that sets the price that will enable producers to realize maximum revenue. If it were not so, the suppliers would set $100 or $200 as the price of a barrel of crude oil. Furthermore, it is not the demand for crude oil that ultimately sets its price, but rather the demand for the products for which crude oil is a factor of production. Obviously, the way to reduce the price of crude oil is to increase the taxes on gasoline and drive the world economy into recession. -g-
Regards, Don |
