Relative oil prices and differential oil profits
from Shimshon Bichler and Jonathan Nitzan
If you thought that oil profits are about producing oil, think again.
The enclosed chart, updated from our 2015 Real-World Economics Review paper, ‘Still About Oil?’, shows that the main determinant of oil profit — and specifically of differential oil profit — is not output, but prices.
The figure shows the correlation between two series: (1) the differential oil profits of the world’s integrated oil companies, computed as the ratio between their earnings per share and the earnings per share of all listed firms; and (2) the relative price of oil one year earlier, measured by the $ price of crude oil relative to the U.S. consumer price index. (The reason for the annual lag is that ‘current’ profits represent a trailing average of earnings recorded over the past 12 months.)
When we wrote the article in 2015, differential oil profits and the relative price of oil were both at record highs; nowadays, they brush against record lows. And that pattern is to be expected. As the chart shows, the correlation between these two measures remains positive and tight, with a Pearson coefficient of +0.69 for the entire period since Dec 1973, and +0.75 since January 1980.
Inflation is always and everywhere a re-distributional phenomenon.
(And expect differential oil profits to rise next year.)
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If the relationship is not supply and demand, then why do prices increase and decrease? In this instance largely in coordination?
About oil prices, read ‘Still About Oil?’
Click to access t3.asp
About demand, supply and equilibrium, or rather their total absence, read ‘The 1-2-3 Toolbox of Mainstream Economics: Promising Everything, Delivering Nothing’.
Click to access t3.asp
On oil, I don’t disagree with the story you’ve assembled. But I believe you’ve omitted one major element, political accommodation. I’ve not carried out interviews or direct observations since I changed jobs doing such research in 2012. But that research from 1989 forward clearly shows an ongoing effort by sellers, buyers, re-sellers, and brokers to reduce political fallout for one another from changes in oil prices. All complex, low key, and guarded. You might want to consider carrying out some interviews and direct observations to look at whether this remains a factor in oil prices. And, if so how much of a factor?
Thank you Ken.
We have researched the topic since 1989, so maybe others should pick it up from here….
For a partial list of our works on this subject, see:
The Political Economy of Armament and Oil – A Series of Four Articles (1989) https://bnarchives.yorku.ca/136/
Bringing Capital Accumulation Back In: The Weapondollar-Petrodollar Coalition – Military Contractors, Oil Companies and Middle-East “Energy Conflicts” (1995) https://bnarchives.yorku.ca/13/
Putting the State In Its Place: US Foreign Policy and Differential Accumulation in Middle-East “Energy Conflicts” (1996) https://bnarchives.yorku.ca/11/
The Global Political Economy of Israel (2002) https://bnarchives.yorku.ca/8/
It’s All About Oil (2003) https://bnarchives.yorku.ca/38/
Dominant Capital and the New Wars (2004) https://bnarchives.yorku.ca/1/
New Imperialism or New Capitalism? (2006) https://bnarchives.yorku.ca/203/
Still About Oil? (2015) https://bnarchives.yorku.ca/432/
Profit Warning: There Will Be Blood (2017) https://bnarchives.yorku.ca/432/
Still in the Danger Zone (2020) https://bnarchives.yorku.ca/634
Thanks for the information. I’ve discussed this with colleagues I worked with at DOE and DOD. They’re not enthusiastic about the work right now. And all my data, notes, and drafts are in their archives. Maybe we can circle back later.
Thank you.