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I am perplexed by this post for two reasons:
== First because it presents a monolithic one-sided view of the whole picture. Profits are clearly more than just a premium. And on the side of profits are wages (and rents). I don't mind paying a little extra to "vote with my dollars for successful companies that satisfied me". However I do mind paying more and more to those companies through time. The question is not profits in themselves, but the distribution of income among wages and profits. And this, since the 70s, is continuously favoring the profits and the megacorps.
== My second objection concerns the curves. This is just macro 101 and reality is much more complicated than that. Treating the price of oil as stemming from a marshallian analysis is the best I have heard in years, I must say. No supply curve here, just ask the Saudis and Chavez. And as for the prices of more typical commodities... well, the prices of potatoes have not gone down through time. Yet I think people eat more "truckloads" of potatoes, don't they?

Steve,

Absent the demand curve this is price elasticity of demand, is it not? The teeny problem I see with oil is that the supply side can be manipulated even though capacity is not constrained. OPEC, quotas and that sort of thing.

Olivier:
Profits and losses are signals to the owners who risked their resources on a venture, and to potential competitors. As Drucker implied, most of the profits happen shortly after an innovation; after that, competition quickly brings unit margins down, and the market share gravitates to the low cost producer, until the product becomes obsolete.

I've seen the experience curve play out as shown time and again. The oil industry's product life cycle is taking longer to play out than, say, the floppy disk life cycle, but it's not exempt from the cycle.

The cost of drilling horizontally for oil, for example, was near-infinite just a few years ago, as was the cost of extracting oil from sands in Canada (reason: nobody knew how to do it reliably on a large scale); but innovations have caused those costs to plummet, just as the curve predicts. Similarly, the cost of providing a battery or capacitor capable of obsoleting the internal combustion engine is near-infinite now, but as soon as new knowledge makes it practical, we can start waving goodbye to the Saudis and Chavez.

As for the price of potatoes, or agricultural commodities in general: the real *cost* of production has been dropping for at least a hundred years, just as the curve predicts; protectionist tariffs and price supports are largely to blame for any *prices* we might think are too high.

Bob:
Although technology has caused the cost of oil production to plummet (now ~$.50/bbl to extract in Saudi Arabia as I recall), the oil cartel has been somewhat reluctant to pass those efficiencies on to us consumers (understatement of the year). One of my greatest hopes is to see a non-oil innovation that blows that whole industry apart -- and the super-battery for autos is the innovation most likely to do that soon, from what I've read.

Steve,

Again, we are in sync. The best way to counter the Saudi's is by substitution as opposed to conservation (for transportation energy). I favor a substitute that doesn't raise the price of chicken. Plug-in hybrids seem to be gaining traction.

http://www.popularmechanics.com/blogs/energy_family_news/4215976.html?nav=RSS20

Steve:
What I was pointing to is that this analysis of prices falling because of higher profits and technological improvements is, to me, over simplified. I agree that in all the tech sectors that might be the case -plasma prices are falling, though you still need to spend around $1500 for a good computer.
However this analysis is restrictive in the sense that it totally forgets about other factors driving prices. If the market gets bigger, then yes, more demand will force competition and falling prices. Note that this crucially depends on competition. In countries such as Europe where competition is less than in the US, prices fall less rapidly. Wages, too, are another factor. Prices fall because there is a demand, and if there is no consumption I don't see why there would be falling prices or even products in the first place. Another factor affecting prices of certain products is also politics (for strategic products like oil).
Finally I cannot help but wonder how those graphs that you put up explain why a steak in NYC is more expensive than in Texas.

What's sad is when fraud occurs. There was an importer of office chairs who went from country to country buying chairs, selling them at a loss to Walmart, and then defaulting on payment. (Then on to the next country to do the same thing again.)

That can destroy an entire industry for several years...and is exacerbated due to the large scale of business now.

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