Thursday, April 28, 2005

The Economics of Oil

My economics post was delayed, but I offer it up now. I had my two last major graduate projects to handle Tuesday and Wednesday, but they are now behind me. So on to the economics of oil.

I have to speak to this topic because of some of the stupid things that have been said on the subject lately. Now I don't claim to be an expert on the oil industry, but I do have a pretty good understanding of economics and international trade. I give that disclaimer in case any of my statements do not apply as presented to the specifics of the oil of the industry. I imagine they do though.

1. Refineries aren't the issue. Saudi Arabia's spinmeister came out this week with the brilliant statement that shipping 10 or 20 million barrels of oil to the US wouldn't affect prices if we couldn't refine it. Sure, our refineries are old and need to be replaced or added to. I agree. But if that's the problem, how did those same refineries function two years ago when prices were half of what they are now? The problem is the price of oil per barrel, which is impacted by only two things- supply and demand. We know demand is higher. We know supply is not, at least not at a meaningful level. I think we can figure out the rest from there.

2. We need to stop burying our heads in the sand and start drilling it for oil. ANWR is not the answer, but it's a step in the right direction. The problem with ANWR is that the distribution infrastructure is not in place and will need to be developed for any drilling there to be profitable to the oil companies and beneficial to us. We need to be drilling the Gulf of Mexico. Lease Sale 181 opened some of the Gulf for oil leases, but the opened area was only 1/4 of the original size proposed by whom? That's right kids- the Clinton administration. Open up the Gulf for drilling. Distribution would be a dream and it's been estimated that the reserves under the Gulf are substantial. Environmentalists of course decry the "inevitable" oil slicks and pollution. Funny thing about oil slicks- they occur naturally as well due to seeping of oil and gas through natural fissures because of the pressure of the reserves. But we ignore that fact. We can't have it both ways, folks. We either have our happy environmentalists and our high oil prices (or expensive alternative fuels that are inefficient and underdeveloped at this point) or we have lower fuel prices and a stronger economy in which to develop alternative fuel sources. I'm not opposed to alternatives. I just realize that they'll take time and money to develop, and unless we do something about our current energy prices, we won't have much of either to work with.

That's my rant for the day. Back tomorrow.

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