Wednesday, May 21, 2008

Lots of Oil News Today

First of all, oil hit a new record high today. I realize this is news like "dog bites man" is news. Still, the closing June price of over $134 is a shocker. Nothing seems to be able to stop oil's rise. I feel personally responsible--I started commuting more than 50 miles round trip to work this week.

For a long time, there have been two schools of thought about high oil prices that get all the press. First are the peak oil guys. For them, the reason oil is expensive is that world production has in fact peaked, while demand is increasing. Half of that is undoubtedly true--demand is increasing. That doesn't mean that supply has peaked, though. This school of thought seems popular with apocalyptic hippies and haters of the modern world, like James Kunstler. Curiously enough, it is led by a guy that is pretty Republican, Matt Simmons. (At least according to the FEC--he's given a ton of money to what looks to be an almost exclusively Republican bunch of candidates and the RNC over the years, except for one weird donation to Barack Obama.)

The other school is the "speculators are causing all this!" school. This, weirdly enough, has mainly come from conservatives (who for some reason have an abiding belief that there is an infinite quantity of oil out there), but the most lucid explanation of it comes from Philip Verleger, who seems not to be a crank as far as I can tell. Some folks in the oil industry have supported this notion as well, perhaps as a way to take the heat off themselves. "Don't blame me--blame Goldman Sachs!"

Now in the middle are a bunch of people who say on one hand, how can we know if this is really peak oil until we see the actual production of oil drop? (After, Hubbert's model worked once, but who is to say whether that was not just a coincidence?) And on the other hand, if this is all about speculation, where are the speculators holding their oil? After all, oil is an actual commodity--you can't drive up the price without hording it. (Of course, as I suggested, it is possible to horde it by not producing it.) The sensible middle view is simply that the price of oil today and the future is expensive because demand is growing faster than supply, and has been doing so for years. James Hamilton at Seeking Alpha has a good explanation of this theory. It's basically what Martin Wolf and Paul Krugman said, as I mentioned in an earlier post.

But the new conservative rallying cry is that the reason that oil prices (and thus gasoline prices) are so high is because those dastardly environmentalists won't let us drill here in the U.S.! Initially the complaint was about ANWAR, then it spread to the Pacific and Atlantic coasts, and today all federally controlled land or mineral rights were added by the Bush administration to this wealth of American oil and gas denied us by feckless treehuggers. Expect to see some outraged blog posts and editorials from the right side of the spectrum about this in coming days.

But to say such a thing seems merely political, a way to blame high gasoline prices on liberals in the run-up to an important election. After all, Bush has been president for seven years, and for six of those years, his party controlled both the House and the Senate. And all during that time, the price of oil went up, and more American dollars were shipped overseas to petro-tyrants. If they really felt strongly about opening up federal land to exploration and production, they had six years to do it. It must not have seemed very important then. It seems hypocritical to start whining now.

(And lest you think I am some mere tree-hugger myself, let me add that I'm all for opening federal land up to exploration--as long as the feds get excellent royalties out of it. I don't think it would matter all that much in the short term though--Anadarko said "it has been producing as much gas and oil as it can given the limited availability of drill rigs and crews." This jibes with what I have heard from other producers as well. In other words, it would take a while for ANWAR and other fields to come on line, and by that time, demand and supply might have settled somewhat anyway--as high prices slow economies, slowing demand...)



Anonymous Anonymous said...

The only way to achieve a short term price reduction is to reduce demand. Since we cannot change our commuting habits immediately, we all could increase our efficiency by reducing speeds to 55 miles per hour. The countries leaders need to reduce the national speed limit immediately to the traditional 55 mph.

2:29 PM  
Blogger Robert Boyd said...

Yeah, that has crossed my mind, too. I think it would be politically difficult to do, but I do think it would have the immediate effect of lowering demand. However, I would suggest this: make a law that says that if the spot price of crude goes above $150/bbl, we reduce the city highway speed to 55 mph. If it goes above $200 mph, we reduce all highway speeds to 55 mph.

This would be, I think, more politically palatable. It would also eliminate the current steep contango forward curve. The forward curve would probably still be contango, but not so extreme.

7:27 PM  

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