Quite Remarkable

The ensuing high paper prices have only encouraged producers further to moderate production.

Tony Curzon Price is quite seriously arguing that supply curves slope downwards.

A really quite remarkable finding in a competitive market, if true, don\’t you think?

14 thoughts on “Quite Remarkable”

  1. Oh very amusing. At no point did he ask himself why nobody else had made such a remarkable and ground-breaking observation, for if he had he might have considered that maybe it is he who is barking mad?!

  2. Isn’t Mr Curzon Price describing the supply curve mirror of a Giffen good. Maybe we could call this new phenomenon a “Curzon Price good”.

  3. I suppose that supply curves can slope down temporarily if the goods supplied were close to exhaustion… couldn’t it?

  4. Is this that stupid? If the expected return on a commodity is higher than the risk-free rate of return you are typically better to leave it in the ground rather than get it out and sell it.

    Speculators often have upward sloping supply curves in the short-run, don’t they?

  5. If the expected return on a commodity is higher than the risk-free rate of return you are typically better to leave it in the ground rather than get it out and sell it.

    Sure, but in the meantime there are salaries to be paid and other unavoidable expenses; this can never be more than just one of the factors in the decision of how much to produce.

  6. you have to be a bit careful thinking through what you mean by “downward sloping” … .of what against what? The “textbook” case of an upward sloping supply curve is of a spot price vs. a spot quantity.

    But if your storable good, you think, will be worth more tomorrow than it is today — as happens in many bubbles, and as often happens in extractive industries — you are looking at the supply curve of tomorrow’s price against today’s quantity. It is no great mystery that this should be downward sloping.

    As for the salaries point — these don’t really enter the decision, since, to a first degree of approximation, they are paid whatever you choose to produce. Your profit change from one period to the next, to a first approximation, is determined by the opportunity cost of the cash (which I argued was low in the article) and the expectation of price changes (which I argued was positive in the article).


  7. You might be interested in this
    Jeff Frankel blog post that essentially makes the point that I was making.

    JF is one of the world’s most respected economists.


    Tim adds: Erm, I’m not sure that Jeff’s statement that the largest oil inventory is the one underground quite supports your case. For your case to be true it is necessary that not only is that true, but that high (or rising) prices are leading to the owners of those inventories not pumping from them (ie, increasing future stocks). I can entirely see that a monopolist might do this: but the oil market isn’t a monopoly: it’s at the very worst a weak oligopoly. Which is why I expressed surprise at your theory. What monopolists might do iof they were indeed monopolists doesn’t work in more competitive markets.

  8. 2 points, Tim:

    1. the futures price point does not _only_ apply to a monopolist. This was the point about the housing market bubble. If you were sitting on a valuable house in 2004 and thinking of cashing in, you were tempted to wait – put your house in storage – if you believed prices would go up and up. The housing market is pretty competitive, but still fell to this logic.

    So to the extent that future prices work into your expectation formation, they reduce current supply. There is no market power here – it is simply maximising expected profits in the face of rising future prices. The basic logic is that the opportunity cost of supplying your asset today is that you don’t supply it tomorrow (…or when your portfolio comes off max capacity…). In the face of prices that are expected to rise, the opportunity cost of extraction today mounts. If you want to think of it in spot supply and demand terms, your opportunity cost gets factored into your supply curve, and so shifts inwards in the face of an exogenous increase in future price expectations. This happens to everyone with an asset of this sort, regardless of any market power.

    2. Saudi Arabia _is_ a residual monopolist — take Saudi production out of world production, and you can’t meet demand. (US and Russia also seem to be residual monopolists). That means that there is some number of barrels that Saudi knows only it can supply. It is a monopolist over those. The situation of residual monopoly of course complicates the straight Hotelling story no end, as does the politics of keeping OPEC together. It is precisely the market power of SA that means that future prices cannot be taken to be exogenous.


  9. And you might be interested in the second half of this discussion over on the Spectator, here:


    Tim adds: “The Nobel prize was not awarded to Hotelling for this observation,”

    Correct, because the Nobel wasn’t awarded to him for any reason. One of them being that he was a mathematician, and given that old Alfred’s wife ran of with one of such he didn’t found a prize in it. Thus the Field’s Medal.

    But your argument still depends upon the thought that the pumping of oil is not a competitive market. I’m willing to believe that it is constrained by technical issues, by the number of pumps, the pipelines, just like any other market can be constrained by capacity problems. But for your argument to work there has to be collusion amongst all the major players (and no, OPEC isn’t large enough here, let alone Saudi A) to pump less, despite no production constraints, in order for future revenues to be higher than those available currently. Large numbers of people have to be actively deciding to leave more in the ground now to get a higher price in the future.

    There’s no model I know of, outside a true monopoly, where this holds for anything longer than the very short term.

  10. ok … i think i see what you’re thinking about.

    Would you say that the UK housing market was a competitive market. And if so, do you think it required massive collusion to get to the point where future prices were expected to be higher than today’s? Did it require massive collusion to get Gladys waiting 6 months before she sold?

    There are many models outside pure monopoly that would allow sustained monopoly-level pricing without perfect collusion. The models of residual monopoly that I mention are one such class.

    Admittedly,most of these models require some ultimate capacity constraints – you certainly find it hard to generate them in a regime of pure contestability. I think the piece about “competitive market” that you are forgetting certainly does not apply here in a term inside 3 to 5 years is ease of entry and exit. The capacity situation changes slowly here, and this is the space that SA is playing in.

    It is odd to accept the existence of bubbles here but not there, and also, with recent experience, to refuse that conditional on a bubble, the sort of behavior I describe be rational. I suppose that was the starting point for my argument – having conceded that markets, and especially markets in which financial markets play key roles, can lead to such serious mispricing (of houses, of tech stocks, of emerging market stocks) … then why the resistance to see similar effects in oil? Why did the Economist have to revert to a “fundamentals” explanation?

    Equilibria in beliefs are much more numerous and less well behaved than equilibria in which some external reality is somehow tracked. This is the power of the Soros quote at the end of the piece, and generally of Keynes’ understanding of the markets over that of his more reality-tracking contemporaries.

    There is the small point of data, also. As the excellent BP review of energy statistics points out, “Saudi Arabia’s output dropped by
    440,000b/d, the largest decline in the world
    last year” [2007]. It has also delayed bringing on-stream fields it has developed for production. I am interested in your model of a so-called competitive market in which the largest supplier and the one with spare capacity reduces output in the face of growing demand. Let me know your model that squares up those facts.


  11. Stephen, you’re right, but I’m not sure how much those considerations apply to Saudia Arabia and oil at the moment, as there profit-margin is something like $130/b, ie about $1.3bn a day, and so any decision to expand production or not really doesn’t need to worry about paying the bills.

  12. Arneson Stidgeley

    Hello, Tony

    You say, “. Saudi Arabia _is_ a residual monopolist — take Saudi production out of world production, and you can’t meet demand.”


    Hmm: By definition, take out ANY supplier and demand can’t be met – at that instant. But if the Saudis were to turn off the taps price would rise to a point where no demand were unmet.

    But I imagine you knew that.

    Or was I misrepresenting you?

  13. well – actually, in the usual theory of competitive markets, take any single producer out of the market and you’re still fine. There is nothing in the basic model about capacity constraints. That is exactly what the “small player” assumption does, and I think this is the assumption that Tim found it hard to drop.

    Once you have dropped it, outcomes are much more difficult to pin down. For quite a general look at these issues there is:

    author = {Klemperer, Paul D. and Meyer, Margaret A},
    title = {Supply Function Equilibria in Oligopoly under Uncertainty},
    journal = {Econometrica},
    year = {1989}

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