This is the crude truth. (H/T Megan McArdle)

Here is the real explanation if you want it.

Yesterday, I talked about how oil prices were to low to fund to the budgets of most petro states. Today, Brad Setser examined the question.

From CBS….

Saudi Arabia reportedly needs to sell oil for at least $55 dollars a barrel to cover the cost of running the country. Fossil fuels finance 75 percent of the country’s entire domestic spending budget, but oil is selling for below that breakeven price.

This metric is a little misleading. Saudi Arabia needs to sell a certain amount of oil at $55 dollars a barrel to fund their country. I have never seen anyone say what that amount is, but the point is an important one to remember. It is the reason that OPEC has little real pricing power in an economic downturn.

In theory OPEC can raise the price of oil just by cutting production. In fact, Saudi Arabia could do this all by themselves if they wanted to. The problem is that a price rise is not enough solve many oil producers funding problems . To keep from going broke, a lot of oil producing countries (Iran, Venezuela, Russia, among others) need a rise in the price of oil without demand destruction. In the current environment, that is a quite a trick to pull off.

That is why when Iran and others scream for OPEC to cut production they really mean that they want Saudi Arabia to cut production. They have no intention to cut production themselves. The Saudi oil minister Ali Al-Naimi makes this very point later on in the article saying….

“Iran tries to keep the price way up; and Venezuela’s trying to keep the price way up. You don’t consider that oil as a weapon?” Stahl asked.

“If you looked at these countries you just named, every one of them would like to sell every barrel they can,” Al-Naimi commented.

“At as high a price as they can get away with,” Stahl remarked.

“Right,” Al-Naimi said.

As a result of these kinds of games, I don’t see OPEC cuts as being very successful at raising the real price of oil anytime soon no matter what headline cuts they announce. Oh sure, the price might jump up and down some, but I don’t think you will see a sustained rise anytime soon (short of a war occurring).

However, in the long term, the real price of oil is going to rise. Simply put, if Saudi Arabia can’t support itself at the current price, no petro state can support themselves. That means that a lot of petro states are going to go bankrupt in the near future. Iran and Venezuela are in a particularly weak position with Russia and Mexico not far behind. The resulting chaos will drive prices back up. It may even drive them way up.

So enjoy the cheap gas you are going to get for the next year or so. It will not last.

Over at the Marginal Revolution, I got involved in a discussion about Obama’s stimulus plan. It got a little out of hand on my end.
I don’t have much use for Keynesian economic views. I still hold to views that I laid out here, although I would hope that if I had to write Click Here to continue reading.

From NPR…

The publishing world is still trying to absorb this week’s bad news: Several publishing houses announced layoffs or salary freezes, and a major reorganization at Random House left two major players in the business without jobs. All this comes as booksellers head into the holiday season — when 25 percent of all book sales occur.

No one thought that publishing would be spared from the current economic turmoil. But when the fallout from the Random House reorganization was announced on the same day that Simon & Schuster and the Christian publishing company Thomas Nelson announced layoffs, it stunned the book world, says Sara Nelson, editor-in-chief of Publishers Weekly.

From CBS…..

Several officials say the White House and congressional Democrats have agreed on $15 billion in loans, which is less than half of what the car chiefs were seeking.

They say the breakthrough came after House Speaker Nancy Pelosi bowed to a demand by President Bush that any aid come from a fund that had been intended to help Detroit produce more fuel-efficient cars.

Pelosi said the House would consider legislation next week to provide “short-term and limited assistance” to the U.S. auto industry.

Talk about an empty measure. If the big three are telling the truth, they will burn through that money before two months are out.

It’s like piracy in reverse, or something. . .

From The Wallstreet Journal Online:

Tiny firms like NetEnforcers Inc. — with only 56 staffers jammed into a dim, spare cubicle farm here in Arizona — wield economic power far beyond their size. These companies scour hundreds of thousands of Web sites daily, looking for retailers offering bargains below the “minimum advertised price,” or MAP, set by manufacturers on an array of consumer goods.

This is technically ruled legal, especially in the case of “authorized dealers”, which are bound to honor MAP agreements as part of being “authorized”. Should it be legal? Here’s the brilliant, convincing defense:

Manufacturers say minimum-pricing requirements are good because they protect a brand’s image from being tarnished by discounting, while helping retailers make enough profit to pay for customer service. Consumer advocates argue that minimum-pricing deals hurt shoppers by keeping prices high and diminishing consumer choice.

I am quite sure that retailers need lots of help from manufacturers in figuring out what is best for them and their customers. Surely, without being bullied into it by manufacturers, retailers would never dream of offering customer service. And, though customers may not realize it, it is in their best interest to pay for image rather than product. And I do mean bullying. . .

If the seller isn’t an authorized dealer — for instance, a discounter that acquired the goods via a distributor — NetEnforcers says other tactics are used to try to force a lowball price off the Internet. In these cases, they can allege that the discounter’s use of the product’s name or image constitutes trademark or copyright infringement, in an effort to force the seller to stop listing the discount. . .They routinely use trademark-violation claims when asking eBay to take down sellers’ pages, “but it’s a bit unfairly enforced,” he says. “They take down the Web sites only of the unauthorized resellers that are selling at discounts,” but don’t bother other unauthorized sellers if they’re selling at MAP. This suggests manufacturers are mainly interested in keeping prices up, not preventing trademark violations. Mr. Cohen says.

Suggests? Really? Gee, d’ya think?

NetEnforcers swear they’re only rightfully concerned about the “intellectual copyright”:

NetEnforcers acknowledges that it uses the VERO program to remove violators of minimum-pricing terms, arguing that it’s an appropriate under the Digital Millennium Copyright Act, a 1998 law designed to help copyright-holders control access to digital copies of their works.

Doling out punishment for the wickedness of the discounters. . .

AceToolonline also says it raised its prices to match MAP. The online retailer’s president, Maria Polidoro, said her company was punished by Black & Decker for the violations. She says AceTool must forfeit some advertising funds from Black & Decker. As another part of the penalty, Black & Decker will also stop routing customers from its own Web site to AceToolonline for 30 days, Ms. Polidoro says.

For some odd reason, some people don’t like this whole deal, and they’re pushing for a legal ban against manufacturers from setting up minimum advertised prices.

Next time you see some awkward phrasing on a website about how they can’t show you the real price since it so low, and you’ll have to add it into your cart in order to see the price, you’ll know why. Using this method, they aren’t technically advertising their low price. If someone whacks you over the head with big stick every time you conduct business, you learn to do it a little more quietly, so as not to attract notice of the head-whacker.

Call me jaded, but it seems to me that every time people attempt market regulation, it usually just means a blossoming black market. If you declare all alcohol illegal, you don’t rid the world of alcohol. You merely turn a lot of people into criminals, who learn to drink a little quieter, sneak a little quicker, and make a lot of money off of bootleg liquor.

If you have to go through a lot of work to prop up your business model, the solution isn’t to get more people out there enforcing the rules you want to play by. Change your business model. It’s the idiot who defies the wind and tells it to blow somewhere else, because this is your yard, and so the wind has to play by your rules. It’s the genius who figures out how to harness the power of the wind and make a kabazillion dollars off of what the wind was just going to do anyway.

From the New York Times…

Fresh evidence unearthed Thursday by investigators in India indicated that the Mumbai attacks were stage-managed from at least two Pakistani cities by top leaders of the militant group Lashkar-e-Taiba.

Indian and American intelligence officials have already identified a Lashkar operative, who goes by the name Yusuf Muzammil, as a mastermind of the attacks. On Thursday, Indian investigators named one of the most well-known senior figures in Lashkar, Zaki-ur-Rehman Lakhvi.

Does this mean that the Lashkar-e-Taiba have lost legitimacy or do we need the UN to certify this?

From Bloomberg….

Russia weakened its defense of the ruble for a fourth time in a month, pushing the currency near a three-year low against the dollar, as the price of the nation’s crude oil fell by a record this week to less than $40 a barrel.

The currency slid as much as 1.2 percent to 28.1344 per dollar and dropped 1 percent to 31.5971 against the central bank’s target basket of euros and dollars. “The corridor has been widened,” a Bank Rossii official who declined to be identified said in a phone interview from Moscow today.

Russia, the world’s largest energy producer, raised interest rates twice last month and drained $143 billion from its foreign-currency reserves to arrest a 17 percent drop in the ruble since August as oil plunged. Urals crude, Russia’s main export blend, slumped 20 percent this week to the lowest in almost three years at $39.82 a barrel, below the $70 average needed for Russia to balance its budget next year.

They have problems.

From the Economist….

AMERICA’S recession is likely to be long and deep if the latest employment numbers are anything to go by. America shed more jobs in November than in any month in the past 34 years, according to figures released on Friday December 5th by the Bureau of Labour Statistics. The fall in employment of 533,000 is far worse even the most pessimistic of forecasters had counted on. Not only are the job losses deeper than expected, workers have been shed across almost the whole of the economy. Health care and government employment were the only remaining bright spots.

With news like that, the stock market’s reaction should be obvious. But just in case you are one of those thick people who have yet to figure out the stock market we point you to this report from Yahoo….

Despite some of the worst jobs data in decades, stocks managed to finish the session with impressive gains after reversing early losses.

From its session low to its session high, the stock market moved from a loss of 3.2% to a gain of 4.1%. It closed with a gain of 3.7%.