Inflation and the Price of Oil

The recent increases in oil prices announced by OPEC, the cartel formed by some producer countries, are once again providing Western governments with an excuse for not honouring their oft-repeated promise to keep down the general level of prices. As after the Arab-Israeli War of 1973, we are hearing the refrain again, that inflation is caused by the rise in the price of oil.

Obviously we hold no brief for the OPEC cartel, but the fact remains that inflation is not caused, or even aggravated, by rising oil prices. Inflation, as the word’s etymology suggests (inflate = blow up), means, correctly understood, an over-issue or blowing-up of an inconvertible (into a fixed amount of gold, that is) currency. In fact, in the nineteenth century the phrase was often given in full as currency inflation, inflation of the currency.

The inevitable result of over-issuing, or inflating, an inconvertible currency, is a rise in the general price level. All prices rise in the same proportion because, as has often been explained in these columns, issuing more of an inconvertible currency than the economy requires for its transactions is tantamount to reducing its gold content. (All currencies, including inconvertible ones, are in economic reality related to gold, whether or not this relationship is legally recognised in some regulation or Act of Parliament.) If an inconvertible currency is defined as, say, one ounce of gold, and twice as much of it is issued as is required by the economy, then its definition will in economic practice change to being half an ounce of gold. All prices — expressed in units of the currency — will tend to double. This is purely a monetary phenomenon and, since governments have a monopoly in currency issue, one for which governments alone have ultimate responsibility.

Unfortunately, the word inflation has come to be used more and more loosely over the years so that it is now almost a synonym for simply ‘rising prices’. This usage is wrong. Inflation is not rising prices. On the contrary, a rise in the general price level is the result of inflation. The easiest way to grasp this is to remember that the word is short for ‘inflation of the currency’.

Oil prices

The recent rise in the price of oil is merely a rise in the price of a particular commodity and not a rise in the general price level, which is unaffected by this change. All that has changed is the price of oil relative to other commodities. Those who have been buying oil now have to pay more and, if they want to continue buying the same amount, will have to cut back on their other purchases. No extra purchasing power — no inflation — is created; there is simply a re-direction of the previously existing purchasing power. This re-direction may be a painful process, since it means that demand for some non-oil products is going to fall, with inevitable bankruptcies and sackings in firms which will no longer be profitable enough. But whatever the result, it can’t be inflation, since that depends on the government. (Of course, if governments respond to the recent increase in the price of oil by printing more money to allow non-oil spending to continue at the old level, then the result will be a rise in the general price level, what is popularly called inflation. But the cause will not be the rise in oil prices but the government decision to print more money.)

The economic laws governing the incomes of those involved in oil production are similar to those governing incomes in agriculture as analysed by the classical political economists in the last century. According to their theory of differential rent, the price of an agricultural product like wheat is determined by its cost of production (plus average rate of profit) on the least fertile farmland in use. All wheat, even that produced or more fertile land, sells at this price. This means that tenant farmers of more fertile land make extra profits, which they have to pay over to the landlord as ground rent. The landowners are thus enabled to draw an income without having to invest any capital, let alone having to do any work, purely and simply because they monopolise a portion of the globe’s surface. The oil sheiks and, in other OPEC countries, the State which owns the land under which there is oil, are in the same position. Their royalties are a pure monopoly income paid them for nothing. (A qualification is necessary here: to the extent that they don’t spend all this windfall income in riotous living — and some of them try hard to — and invest a part in oil production, then a part of their income becomes profit, a return on the capital they have invested, and not differential rent. A part of their income, though, is always such rent.)

Since the cost of production of oil is cheapest in the Saudi Arabia area, the sheiks who monopolise the land there get the biggest free income, differential rent, royalty, monopoly profit, call it what you will, quite literally for doing nothing. This explains, incidentally, why Sheik Yamani can afford to be in favour of more ‘moderate’ price increases than some of his fellow price-fixers. All they have to do is to lounge about in their palaces waiting for the money to roll in — just like the landed aristocracy of Britain until the opening up of much more fertile wheat lands in North and South America during the nineteen: century deprived them of this privilege.

Absolute Ground Rent

Marx, in Volume III of Capital, identified another element in the income of landowners over and above differential rent, what he called ‘absolute ground rent’. This was the ransom the landlord class was able to extract from the rest of society — essentially, a diversion of surplus value from the capitalist class to the landlord class — by exploiting its position as the monopoliser of a limited natural resource, land. Such absolute rent can only exist where the landowners are well organised, where in fact they form a compact and relatively small group, as did the aristocracy in Britain in the nineteenth century. Today’s oil royalty owners are in a basically similar position. A relatively small group, the members of OPEC, has been exploiting its monopoly position to extract absolute ground rent from the industrial capitalist world. This is different from different-rent — which will come their way anyway, whether the OPEC cartel exists or not, simply as a result of the normal workings of the capitalist economy — and depends entirely on the balance of forces between the two sides.

As the world’s oil resources are used up, so the cost of producing oil — and hence its value and price — tends to rise in any event, since less productive wells and fields now have to be exploited. As the cost of production of oil rises, so, of course, the differential rent of the oil monopolists falls, an additional reason, no doubt, why the rulers of the OPEC countries a seeking to recuperate the loss of this part of their purely parasitic income by trying to increase the other element in it, absolute ground rent.

This quarrel between the OPEC rulers and the capitalists of the industrialised world is not one that concerns the world’s workers. For, as our analysis has shown, it is essentially a conflict over the division of the spoils of the exploitation of the working class. When we describe the OPEC rulers as ‘parasites’ it should be clear that they are parasites on the world’s industrial capitalists. Since these latter are also parasites — they’re the ones who directly exploit wage-labour for surplus value — the oil sheiks and other OPEC rulers are really parasites on parasites.

What happens to the surplus value the working class produce after it has been extracted from them by the industrial capitalists during the process of production — whether or not these latter are forced to share some of the loot with some other group, and how much — does not affect the workers. But it vitally concerns the capitalist class. Which is why they have launched the current press campaign — with its racialist undertones and including the myth that rising oil prices cause inflation — directed against OPEC.

If the rent, absolute and differential, of the oil sheiks were reduced to zero, the working class wouldn’t gain a penny. But the capitalist class would, just as they did following the abolition of the Corn Laws in Britain after 1848 which enabled them to pocket a part of the surplus value which they had previously been constrained to disgorge to the landlord class as rent.

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