Offshore oil drilling

From Pat Lang:

Larry Kudlow, the financial whiz, was on the Joe Scarborough show on MSNBC today. He repeated his unending mantra of "drill, drill, drill," as a way out of the current wilderness of high priced crude.
...
"Approval of drilling will frighten the futures traders out of the market and the price will go a long way down." "They are already leaving the oil futures market" he went on. "This will push them out even faster."


So basically the logic behind expanding offshore drilling is that speculation is a big reason for high oil prices, and that drilling will frighten speculators into thinking that the price will go down in the future, thus they will get out of the market and the price will go down right away. But if you think that the price of oil is high because of expanding demand and future shrinking supply, then offshore drilling would do absolutely nothing to oil prices, because it would contribute less than 1% to world oil supply:

Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant.
Also, check out this interesting article Flanders sent me on speculators, The Speculator as Hero:
The miracle is that in taking care of ourselves, we speculators somehow ensure that producers all over the world will provide the right quantity and quality of goods at the proper time, without undue waste, and that this meshes with what people want and the money they have available.

7 comments:

Chris said...

Kudlow is a "perma-bull". In my time watching him on TV, he has always been bullish on America, the stock market and the Economy no matter how bad it looks. Practically every time the stock market hits new lows he is one of the first to run out and call a bottom. He is more of a entertainer and TV showman than an analyst. He claims to be free-market while at the same time congratulating the Fed on the numerous bail outs they have orchestrated. Anyways, regarding his point about drilling more...

Would it really have much of an effect? Well, it would help in terms of supplying more oil to the markets but its long term effects would most likely be negligible.

Adrian said...

Actually drilling would supply oil to the markets only in the long term - it would take a few years for any drops of new oil to reach the market.

I like the term "perma-bull"

Jay@Soob said...

I agree with you Adrian. Even with the long term supply advantage and the short term speculative advantage, Kudlow doesn't seem to be considering growing demand in China or India not to mention plenty of other states on the up and come. Drill, drill, drill makes for nice political rhetoric I suppose. But in terms of a long term energy strategy, it's a short term convenience.
One possible mitigating factor could be an increase in yield as our pumping technology gets better. If I remember correctly if we claim 30% of a wells supply we're doing exceptionally well.
That bit aside I think it folly to hedge our long term energy bets on off shore drilling.

Adrian said...

As political rhetoric it works too - Pelosi has refused to allow the House to vote on expanding offshore drilling because the polls are in favor of it.

As for expanding yield, just like expanding drilling it can delay the inevitable or make it less painful, but we still need to replace oil for a huge chunk of our energy consumption.

cflanders said...

Yeah, I like "perma-bull" too. It reminded me of going apartment hunting this weekend. The broker was talking about real-estate..."oh, prices have gone down, we've hit a soft spot, great time to buy."

So, lets get this straight...prices going up "great time to buy, prices are going up." Prices going down..."ooh, get your house cheap, buy now!" Never a bad time to buy a home, just like Kudlow would tell you never a bad time to buy stocks.

Whats interesting to note is the S&P Case Shiller Index which measures the price of housing...there are futures that trade the index and they are predicting a housing bottom in the middle of 2011.

Adrian said...

Ouch, we'll be looking to sell ours in 2010...

Adrian said...

I think it's important to note that the distinguished Republican Congressman from Idaho, Bill Sali, believes that "there could be up to 40 barrels of crude oil in a single tree," and that "forty percent of the mass of every tree in the forest is crude oil," and that Sali is also apparently an ally of McCain's "drill now, drill forever" policy.

http://obsidianwings.blogs.com/obsidian_wings/2008/08/crude-oil-from.html