Tuesday, June 24, 2008

Stupid political reactions to high oil prices

Eliminate "speculators." Restrict futures trading. Levy windfall taxes on oil companies. Open up more areas for drilling. They're all dumb ideas that might actually get implemented as Capitol Hill tries to fix a problem they should stay out of. None of those will work.

Eliminating speculators reduces the liquidity of the energy market. That increases risk. Ditto for restricting futures trading. Both make oil prices more volatile and less predictable. When the outlook is risky, people tend to reduce their exposure, i.e., produce less oil.

The same applies to windfall taxes. Why should Exxon invest in more production and refining capacity, if the profits of those investments will just get taken away from by the federal government? It's hardly an incentive for them to do something that would really increase oil supplies and cut prices.

Then there's increasing drilling in places like the California coast and the Arctic National Wildlife Refuge. In the best of scenarios, those supplies will reduce oil prices by a couple percentage points in a decade, but more likely in 15-20 years. If it's going to take that long, we might as well just build nuclear plants.

I'm starting to see a silver lining here, though. Oil prices are not a concern for me at this time. What is a concern is oil use. If Congress wants to waste its time pursuing measures that are ineffective or counter-productive, that's actually not a problem. It means less production at higher prices, and thus lower use. That means less pollution and a bigger market for alternative energy sources.

As such, I'm less worried about Congress doing something stupid, and more worried about them doing something stupid that has broader costs. Any policy that directly or indirectly encourages using more coal, for example, is a net loss. Drilling in environmentally sensitive areas is also a no-go. I certainly don't want to expand subsidies, either on the producer side or the consumer side.

There's certainly going to be a cost to some people of the "acceptable" stupid policies. I don't mean to overlook that. Realistically, though, they'll be fine. Wall Street will find other places to play, and the oil companies will adapt their financial models. Congress may end up inadvertently hastening the end of the oil era.

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Anonymous Anonymous said...

Should also note that O&G companies aren't drilling on a lot of the leases they already hold -- land that's already available for drilling -- for any number of reasons. Plus, the cost of the next barrel out of Alaska, GoM, etc., is prohibitively expensive. You can open up the areas, but the oil companies aren't going to walk the talk necessarily.

Also, another thing people don't realize -- domestically produced supply doesn't necessarily stay domestic. It goes to the highest bidder globally and so that means you could open up ANWR, but all that production could be hauled to Japan or China. It'll increase overall supply but not enough to make a supply.

-- O&G insider

June 25, 2008 at 12:29 PM  

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