Crude Oil Prices--A Comment

Abstract

THE paper on 'Crude Oil Prices in the United States at the Gulf Coast' by Professor Wayne A. Leeman is a most welcome contribution towards the clarification of problems which are approached, if at all, mostly for their political and legal implications rather than for their significance in terms of economics. Professor Leeman's conclusion that the price of crude oil at the U.S. Gulf Coast is determined by an oligopolistic system qualified by strong competitive forces within the system is to my mind correct; his analysis, however, does not appear to cover all the underlying factors and some of his conclusions are therefore perhaps less generally applicable than they might be. Professor Leeman sums up his paper by saying: 'Under present circumstances ... the consumer of petroleum products need not worry about the control over price which the producing states or the importing majors might exercise.' The main reasons why he is not afraid of the oligopolistic power of the Oil States with their opportunities of control of domestic output existing alongside the control of a few international oil companies over imports are: firstly ease of entry of newcomers, and secondly competition among the three main oil-bearing States and of the big oil companies who also handle the import of foreign crudes. Whereas it is correct to say that in theory it is easy to set up shop in drilling in the U.S.A. and new production is in certain cases privileged compared with old fields, the fact remains that during the last decade or so there have been no new discoveries of sufficient magnitude to affect materially the supply position; also new production is now inevitably more costly in terms of money than fields found and developed earlier on when the progressive erosion of monetary values had not yet reached the present extent. It is therefore less likely to result in a lowering of crude oil prices. The rivalry of the three main oil states to which Professor Leeman refers is very real but, there being so few of them, can it be expected to express itself in moves which would affect the price level? Are they not virtually compelled to remain in step lest they fall together? The further element on which Professor Leeman relies for turning oligopoly into working competition, the impact of foreign crude, has now proved to be hemmed in altogether by presidential encouragement of 'voluntary' self-denial by the im-