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Unfortunately I am not well versed in economics or the political economy to understand fully certain aspects of your texts.
In your recent article “Blood and Oil in the Orient” I am having trouble comprehending the 3rd chapter: It’s all in the money. Could anyone boil it down to the simplest terms? Perhaps an analogy?
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Particularly this part: “And the results leave little to the imagination: based on the R2, the variance of the relative price of oil explains 66 per cent of the variance of the differential EPS of the oil companies since December 1973, and as much as 73 per cent since January 1980. In other words, oil companies increase their differential EPS mostly through differential inflation. And given the close correlation between net oil profit and OPEC’s oil exports shown in Figure 1, we might expect relative prices to have had a similar impact on the share of OPEC’s oil revenues in global GDP.”
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Hi Byron,
We can break it down in parts:
– R2, R-squared, R^2: This is also called the coefficient of determination. Compared to other statistical methods or economic papers, BN are not using it in a overly complicated manor. My interpretation is this: there is a strong coefficient of determination between oil prices and differential EPS of oil companies. Therefore, it is likely for differential EPS to increase with rises in oil prices, and it is likely for a fall in oil prices to hurt differential EPS. Essentially, war in the Middle East can send the price skyrocketing, and price inflation is the main method for oil companies to profit relative to a benchmark, such as the S&P 500.
– Tying this to OPEC: In my opinion, they are anticipating counter-claims that studying oil in the Middle East is “more complicated” than they present. I imagine a scenario where someone at the end of a presentation says “What about OPEC and its conflict with the interests of [American and British] oil companies?” BN are not denying there is more to research in historical detail, but their evidence shows OPEC exports are not depressing the strength of the relationship between oil prices and profit.
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Blood and Oil in the Orient: A 2024 Update
After years of falling relative oil prices and differential oil losses, the 2022 Russian invasion of Ukraine boosted both and helped pull the Middle East out of its ‘danger zone’.
A year later, the war that broke out between Israel on the one hand, and Hamas-Islamic Jihad-Hezbollah-Iran on the other, promised to increase those relative prices and differential returns even further.
But these hopes were dashed.
As the figure below shows, in 2023, relative prices and differential profits both sank, pushing the Middle East once again into the ‘danger zone’.
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