Michael Hudson: America's Free Lunch is Over

[Rajiv]

Re: Michael Hudson: America's Free Lunch is Over

You can embed it using the Media tags the big M in the compose window

I'm embedding it below

[MEDIA]http://aud1.kpfa.org/data/20080625-Wed1300.mp3[/MEDIA]

[Guest]

Re: Michael Hudson: America's Free Lunch is Over

There is a pretty interesting audio interview from Guns and Butter from a couple of days ago with Dr. Hudson. Over the last couple of years I've listened to just about every Michael Hudson interview I could ever find and *this* one is the most scary.

Thanks for the link Merry. I listened in. Lot's of good stuff there, but when he gets into the underpinnings of the oil price and refinery bottlenecks I found myself reacting incredulously. There is some manifest nonsense creeping into Hudson's analysis in that one area. The rest sounds quite good, although I had to take a good number of his points on his word, and primarily on the reputation he enjoys here at iTulip.

What gives me considerable pause rather, is that if he gets the logic surrounding the oil major's positioning during the evolution of this oil crisis so thoroughly tied up in knots, I'm left wondering what else he's gotten a bit distorted. The logical gaps, arbitrary assertions and lacunae scattered all over his thesis regarding the oil majors having been the prime architects of today's gasoline prices is really a bit shocking. The US has been possibly the most hostile environment for the construction of new refineries for decades, and here is Hudson flat-out stating that the refinery bottlenecks are entirely a product of the oil major's canny strategic maneouvering.

Sorry - others here may dote on his every interview - and I appreciate a great deal of his analysis of the FIRE economy - but anyone here who accepts this analysis of the oil majors without comment (what I mean to say bluntly, is that it is bunk) is to my view abdicating their healthy capacity for skepticism. You cannot build such subtle and audacious analysis as does Dr. Hudson and then descend into such nonsense as calling today's refinery squeeze in America a "product of big oil", without sending up a large red flag to people scrutinising ALL components of his thesis for plausibility.

The analysis of the big oil companies suggests to me a similar bias on his part may then go on to infuse any number of other points he makes at an international level, which up until that point I had been provisionally accepting on faith - due to his reputation. When I find a large ideologically tinted component of what I regard as pure silliness in his view of what has really constrained the construction of new refineries, I instantly raise my guard elsewhere. Nowhere does Hudson allow any consideration of the fact that oil companies are taxed far more highly than any other sector of enterprise in the US, that Congress has decades of history of peeling back yet further layers of their hide at every turn when rummaging around for new sectors to tax.

Nowhere does Hudson acknowledge the fallacy of even calling American oil majors "big oil" today as they've been stripped of their former concessions worldwide by increasing nationalisations. These are absolutely second fddle players now to the national oil companies worldwide. Nowhere does he offer a murmur of acknowledgement that when they spend billions on exploration and infrastructure in foreign countries and those resources are then nationalized, it is precisely these US "majors" who have to eat the gargantuan losses. Also summarily ignored are their gargantuan losses from exploration budgets worldwide which increasingly turn up dry results due to dwindling oil, or their massive risk exposure in places like the Gulf of Mexico.

I enjoy Hudson's analysis well enough, and he's certainly brilliant. But when I accord an analyst the moniker of "brilliant" I don't expect him to ever permit himself to slide into this kind of reflexively anti-big-corporation glossing of the overwhelming fundamental constraints, when analysing what underpins the oil prices. The interviewer very cautiously hints to him that his analysis of the underpinnings of the oil price as being wholly wrapped up in the US dollar may be a little skimpy - and yet he declines to even qualify his assertion to some modest extent. I don't buy his portrayal of that point, and I wonder what other assertions within his analysis I might disagree with were I informed enough.

Sorry - I'm really not ideologically motivated here at all, it's just I don't like to see any even small piece of slanted analyses creeping into such an intelligent man's arguments. Also his conclusion that the US is on the cusp of attacking Iran seems to me another flag that the entirety of his analysis is not something I would comfortably bet on. I find it a bit astonishing.

This is absolutely, categorically NOT an ideologically driven objection. It is an objection based on having found a component of his arguments which to my view is apparently highly implausible (big US oil "majors" and the USD as primary agents having "manufactured" the gasoline and oil prices). The price of oil, and the price of gasoline are NOT political constructs, nor products of collusion - anyone who flatly claims they are earns my distrust as to the "infallibility" of their broader analysis. That Hudson should so clearly intimate they are is a real eye opener. The rest of the interview of course was fascinating.

[FRED]

Re: Michael Hudson: America's Free Lunch is Over

Thanks for the link Merry. I listened in. Lot's of good stuff there, but when he gets into the underpinnings of the oil price and refinery bottlenecks I found myself reacting incredulously. There is some manifest nonsense creeping into Hudson's analysis in that one area. The rest sounds quite good, although I had to take a good number of his points on his word, and primarily on the reputation he enjoys here at iTulip.

What gives me considerable pause rather, is that if he gets the logic surrounding the oil major's positioning during the evolution of this oil crisis so thoroughly tied up in knots, I'm left wondering what else he's gotten a bit distorted. The logical gaps, arbitrary assertions and lacunae scattered all over his thesis regarding the oil majors having been the prime architects of today's gasoline prices is really a bit shocking. The US has been possibly the most hostile environment for the construction of new refineries for decades, and here is Hudson flat-out stating that the refinery bottlenecks are entirely a product of the oil major's canny strategic maneouvering.

Sorry - others here may dote on his every interview - and I appreciate a great deal of his analysis of the FIRE economy - but anyone here who accepts this analysis of the oil majors without comment (what I mean to say bluntly, is that it is bunk) is to my view abdicating their healthy capacity for skepticism. You cannot build such subtle and audacious analysis as does Dr. Hudson and then descend into such nonsense as calling today's refinery squeeze in America a "product of big oil", without sending up a large red flag to people scrutinising ALL components of his thesis for plausibility.

The analysis of the big oil companies suggests to me a similar bias on his part may then go on to infuse any number of other points he makes at an international level, which up until that point I had been provisionally accepting on faith - due to his reputation. When I find a large ideologically tinted component of what I regard as pure silliness in his view of what has really constrained the construction of new refineries, I instantly raise my guard elsewhere. Nowhere does Hudson allow any consideration of the fact that oil companies are taxed far more highly than any other sector of enterprise in the US, that Congress has decades of history of peeling back yet further layers of their hide at every turn when rummaging around for new sectors to tax.

Nowhere does Hudson acknowledge the fallacy of even calling American oil majors "big oil" today as they've been stripped of their former concessions worldwide by increasing nationalisations. These are absolutely second fddle players now to the national oil companies worldwide. Nowhere does he offer a murmur of acknowledgement that when they spend billions on exploration and infrastructure in foreign countries and those resources are then nationalized, it is precisely these US "majors" who have to eat the gargantuan losses. Also summarily ignored are their gargantuan losses from exploration budgets worldwide which increasingly turn up dry results due to dwindling oil, or their massive risk exposure in places like the Gulf of Mexico.

I enjoy Hudson's analysis well enough, and he's certainly brilliant. But when I accord an analyst the moniker of "brilliant" I don't expect him to ever permit himself to slide into this kind of reflexively anti-big-corporation glossing of the overwhelming fundamental constraints, when analysing what underpins the oil prices. The interviewer very cautiously hints to him that his analysis of the underpinnings of the oil price as being wholly wrapped up in the US dollar may be a little skimpy - and yet he declines to even qualify his assertion to some modest extent. I don't buy his portrayal of that point, and I wonder what other assertions within his analysis I might disagree with were I informed enough.

Sorry - I'm really not ideologically motivated here at all, it's just I don't like to see any even small piece of slanted analyses creeping into such an intelligent man's arguments. Also his conclusion that the US is on the cusp of attacking Iran seems to me another flag that the entirety of his analysis is not something I would comfortably bet on. I find it a bit astonishing.

This is absolutely, categorically NOT an ideologically driven objection. It is an objection based on having found a component of his arguments which to my view is apparently highly implausible (big US oil "majors" and the USD as primary agents having "manufactured" the gasoline and oil prices). The price of oil, and the price of gasoline are NOT political constructs, nor products of collusion - anyone who flatly claims they are earns my distrust as to the "infallibility" of their broader analysis. That Hudson should so clearly intimate they are is a real eye opener. The rest of the interview of course was fascinating.

EJ writes in:

We appreciate the scholarship and decades of experience in Hudson's critiques, yet tend to argue with his solutions. We see entrepreneurs as the foundation of US wealth, and to the extent that he sees the FIRE Economy burdening and thwarting the Entrepreneurial Economy, we are deeply in sympathy. On his critique of the oil industry, while not above reproach, please bear in mind that he was doing oil studies more than 40 years ago when he worked for Chase and since then, before the US unilaterally ended the international gold standard, before the currency and oil turmoil in 1970s, and before some oil experts offering theories today were born. He has lived through all of the various cycles and heard all the theories before. I believe that he has arrived at his beliefs the hard way, through long experience, and while his may not accord with the perspectives of other analysts, it is our challenge to try to integrate, or not, his perspective into our beliefs that we have developed from other sources.

A common thread of Hudson's analysis is that where most of us see the actions of markets he sees the fingerprints of political interests, of governments acting alone or in concert with financial interests and large corporations to meet objectives that mutually benefit large private players and the government, often not in the interests of voters. Readers not familiar with his work and background may view him as blinded by a desire to see the actions of big corporations; he may perceive readers who imagine that markets are primarily players in the case of gasoline prices as naive and credulous. There are two sides to every story. What I most appreciate about Hudson is that no matter what your wish, for greater market liberalization to reinforce the Entrepreneurial Economy or more support for the middle class, he will tell you what he believes to be true and not what anyone wants to hear.

[jk]

Re: Michael Hudson: America's Free Lunch is Over

The US has been possibly the most hostile environment for the construction of new refineries for decades, and here is Hudson flat-out stating that the refinery bottlenecks are entirely a product of the oil major's canny strategic maneouvering.

the majors haven't reduced refinery capacity enough for the refineries to be making any money in this environment. take a look at their stock prices.

[bill]

Re: Michael Hudson: America's Free Lunch is Over

No carbon impact analysis was used in this report.
http://www.eia.doe.gov/oiaf/aeo/
http://www.csis.org/component/option...,view/id,1687/
Carbon constraint is the game changer.

[World Traveler]

Re: Michael Hudson: America's Free Lunch is Over

Michael Hudson did an interview with Counterpunch in 2004, on off-shore banking and tax havens, and how multi-national corporations use them to minimize taxes. It's well worth reading, to understand how major corporations that operate in multiple countries use "transfer pricing" to increase profitibility, by manipulating the transfer price between countries, in order to minimize taxes.

In article, he talked about the "transfer price" used internally in oil companies, the price at which the Upstream (Production) internally sells crude to the Downstream (Refining & Sales). It explained something I hadn't really understood when I was working at an oil company in the late '80's, that had Production fields overseas.

I've always worked in IS, and at that time, I was working primarily with the Downstream folks. They were under tremendous pressure to increase their profitability. I heard some complain about the transfer price from Upstream, stating their belief that it was too high, so Upstream was always profitable, and it was impossible for Downstream to be truly profitable.

Acc to Hudson, the oil companies set the transfer price to get the most favorable tax treatment and maximize overall corporate profits.

When we look at the dramatic decrease in overall level of taxes paid by all types of multi-national corporations from from 1950 to today, this interview on off-shore banking and tax havens goes a long way to explain some of reasons it has happened.

http://www.counterpunch.org/schaefer03252004.html

[Guest]

Re: Michael Hudson: America's Free Lunch is Over

the majors haven't reduced refinery capacity enough for the refineries to be making any money in this environment. take a look at their stock prices.

"Take a look at their stock prices" - points out the matter of doubt, in a nutshell. The refiners are mere appendages to the net profits component of the balance sheets of the oil majors. I also appreciate the point WT is referencing Re: Hudson's earlier comments on the transfer pricing of the crude as it's passed to downstream subsidiaries being a tax positioning move (which further illustrates the refiners vestigial relevance to the oil major's principal net cash earnings, i.e. their net earnings are "convenient to manipulate" rather than "critical"), so the fact is

A) refineries don't make the really big money in the oil major's gamut of activity,

B) oil majors jiggering with transfer pricing to the refiners in order to extract tax advantage would have had to evidence a sharply declining margin of profitability in those refiners over time, in order to accrue a commensurate increase in tax advantage to the upstream company across that time span, whereas the refiners profit margins haven't really done anything?,

C) the gasoline price just like the oil price is also subject to the restraints of international arbitrage, so any attempted manipulation of the gasoline price by withholding refinery capacity in the US is by definition struggling against an international price arbitrage of some sort (a general corollary of E below ),

D) with all the regulatory and congressional "oversight" headaches which the oil majors have in this market, whyever would they consider it prudent to extract relatively small price advantages while engaging in collusions in the retail gasoline market which laid them vulnerable to draconian governmental responses were that collusion ever uncovered? Don't these oil majors think strategically as well as tactically?

E) why have not heavy crude refiners such as Valero or Tesoro let alone Venezuela's CITGO stepped in to fill the artificially constructed refinery void and thereby eat the oil major's lunch? The questions abound, rendering the thesis one which Hudson really needs to substantiate rather than our having to disprove him. On a point this fraught with large open objections it is not enough to rely on his admittedly highly impressive CV alone to back this assertion.

I remain skeptical of the assertion that the integrated oil majors can notably increase the gasoline price by with-holding the construction of new refinery capacity. This is to claim that they can do this without any hindrance by other foreign refiners shipping in refined gasoline from elsewhere (as well as independent domestic refiners eating their lunch domestically!!). The thesis is what might be termed "very audacious". Effective price manipulation in the gasoline retail business would be roughly analogous over time, to trying to build up steam pressure inside a leaky vessel.

EJ's point is fully taken. This man has a truly impressive credential to express such views, such that it's almost as though the burden is on the rest of us to "disprove" any of his assertions. Meanwhile, JK's point goes succinctly to the core of the doubt. The refineries are an appendix to the petroleum industry - their manipulation by withholding new refinery capacity would appear to be a lumbering, and apparently extremely diffuse and inefficient tool to increase their net profitability, tax consequences in crude included. That's not even to mention the potential regulatory headaches risked by implementing such a strategy collusively.

Further degrading the risk / reward obtainable by such a markedly peripheral strategy, the price of that gasoline would also appear notably eclipsed by the internationally arbitraged price of crude, and also notably, by their own success or failure in opening large new exploration prospects of oil to production, which is their primary business. In that light, such an apparently highly inefficient attempted manipulation of the US domestic gasoline price manifestly recedes to become a tiny corollary of the oil major's broader profitability. Why go to all that effort and risk for such a small profit fraction?

Meanwhile in hard economic times oil major's profit margins are routinely taken out to the woodshed and summarily decapitated by congressmen and senators pandering to populist outcry. Dr. Hudson may be right, but instinctively, I am distressed to see his opinion of the origins of their profit margins so uniformly aligned to that populist outcry. Nobody is suggesting Dr. Hudson is a populist, that assertion would be merely silly. But we do know that history evidences the populist outcry is most often false. We heard all the "extortionate profits" chatter through the 1970's from hack career congressmen and senators and we are hearing it from a whole new crop of hack career congressmen and senators again today, in this new oil constrained market.

Hudson may be right, but I am not buying his assertion here. What's to stop companies like Venezuela's CITGO Petroleum Corp., which itself is the third largest refiner in the United States from simply arbitraging away the presumed manipulations of Hudson's "oil majors"?

[World Traveler]

Partial reason for lagging refining capacity in U.S.

There is an June 21, 2008 interview with Dr. Michael T. Klare on Financial Sense's radio program that partially answers the question as to why major U.S. oil corporations and refiners have not built more refining capacity here in the U.S.

The short answer is that the oil-exporting countries, particularly Saudi Arabia, are transforming themselves from being solely crude exporters, to having major infrastructure in the Downstream also, particualy refining and chemicals. He mentions that Saudi Arabia is building 4 new major petrochemical complexes, to grab more control and profits on the Downstream side of the business.

These comments start at approximately 20 minutes into the interview.

http://www.financialsense.com/fsn/main.html

[c1ue]

Re: Michael Hudson: America's Free Lunch is Over

Each person must determine whether Dr. Michael Hudson has the chops or not for what he says to be true.

For me, I've seen how taxes distort corporate behavior:

When I worked abroad for one of my previous employers, I had the privilege of a friendship with the comptroller of my local subsidiary. While she was in Asia, she was also responsible for ex-USA bookings from a tax standpoint.

Why is this relevant? For a period of 4 or 6 years, nearly 100% of all European (and also some other international revenue) earned by my company was booked through Ireland. Not coincidentally, Ireland was the recipient of a large spanking new design center.

I can't remember the details, but I do believe my previous company saved double digits percentage in revenue due to the taxation benefits.

The parallel here is the refinery = design center, the tax dodges are the same.

Certainly not identical, but I do believe a similar pattern exists.