Offshore Drilling? Come On.
For those who aren’t aware, the Republicans in the House of Representatives recently made a big fuss about Speaker Pelosi dismissing the session (in accordance with House rules), refusing to allow a vote on a bill that would allow offshore drilling of oil. Granted, she acts like a crazy person. (”I’m saving the planet! I’m saving the planet!”? What’s that all about?) But offshore drilling really doesn’t make a whole of sense to me as a way to attack current oil prices.
Here’s an image I dug up recently:
Fascinating, isn’t it? Sure, the cost of oil has risen dramatically in comparison to the U.S. dollar over the last seven years. But gold is a pretty steady international measure of wealth, and that bottom line (the cost of a barrel of crude oil in ounces of gold) is pretty darn steady. It suggests to me that the real problem here is oil’s age-old attachment to the U.S. dollar, not dramatic changes in supply and demand. It looks more symptomatic of the depressing decline of the international value of the American dollar.
How is adding a miniscule amount of local oil to the mix going to dramatically improve that situation? I’d have much more confidence in a little careful regulation of oil futures.
There really is a silly amount of oil speculating going on right now. One airline (Southwest?) has been able to maintain reasonable prices because they bought billions in oil futures in the 90s. It looks good for business to buy tomorrow’s oil at today’s prices, and consequently they buy ten times 2008’s actual demand in oil in 2008, artificially exploding the demand beyond any reason.
The idea behind offshore drilling helping today’s prices actually depends on speculation. Companies like airlines would see that oil might become cheaper (due to domestic production) in 10 years when the offshore drilling finally bears fruit, and refuse to speculate at today’s prices for 10 years in the future. Thus 2008’s manufactured “demand” drops dramatically as a result of 2018’s projected oil production.
The problem with this is that the oil produced by offshore drilling would be a drop in the bucket compared to total domestic oil demand, and couldn’t reasonably be expected to cause a major price drop even when it’s finally ready to start pumping.
What’s the solution? I don’t know. Speculation is a naturally-occurring cancer on free market societies. I mean, look at Enron. They were wildly successful at marketing energy speculations. Also, they managed to cause rolling blackouts in California despite a vast excess of actual supply of electricity. Maybe we could consider regulating these oil speculations similarly to ward off similar problems in oil.
I’m no economist. Maybe I’m wrong. But offshore drilling? Give me a break.
August 4th, 2008 at 4:52 am
Not a bad thought, but just GW Bush removing the executive order against offshore drilling caused a $20/bbl drop in price. So the threat of offshore drilling has a huge short term impact. The congressional law now needs changing. Then watch a price collapse.
Also, new production will really start flowing in 18 months or less. Oil companies want to get the $$$ out of any oil wells as quickly as possible, before the inevitable price collapse. When I was in the oilfield the price dropped over 50% in one month because Congress finally got some regulations out of the way.
Is the speculation causing the problem? No. Speculation is causing the solution. With the price of oil so high, alternative energy sources like nuclear may restart, drilling is dramatically increasing on dry land, and conservation is happening. All because the price got so high.
Oil and Gold. Yep. An amazing link. I think it may only prove that we have an underlying inflation bubble caused by runaway government money creation and spending. In other words, we may go through a period of 100% inflation over the next 5 years caused by The Federal Reserve and US Congress.
August 4th, 2008 at 8:06 am
Yup! Good ole’ government interference to the rescue. France, I’ve heard, uses 80% nuclear power. Good for them. Next - getting Yucca Mountain okayed for storage. I did a research paper essentially on that, and looked at the government reports. Except the worst case disaster scenario, the max radiation output of that would only double the background radiation for a small area around the site after 100,000 years. That’s right, 100,000 years.
August 5th, 2008 at 6:34 pm
I think that gold is just as rife with speculation as oil is, so I think what this shows is that commodity speculation hasn’t favored oil over gold or vice versa. It’s interesting how close they are. I’m not really sure what the best comparison of actual value would be other than inflation-adjusted $$.
I think airlines and others buying futures is overall a good thing. That’s really what financial markets are for — paying (on average) a premium to avoid risk… you don’t pay today’s prices on a futures contract. Also this doesn’t have much affect on their total oil consumption so over a period of time (and spread among all the airlines) I don’t think this would have a big net effect on prices over time. But I still have some things to learn about futures…
August 13th, 2008 at 8:51 am
“Speculation is a naturally-occurring cancer on free market societies.”
Cancer? Malicious? To the contrary. Speculators save in times of abundance and sell in times of scarcety. Without times of scarcity would be harder.
Thank you speculators!!