Wednesday, July 30, 2008

Drill now, pay less

I've seen objections to the idea of opening up oil fields in Alaska and the Gulf of Mexico which say things like "Drilling in Alaska's National Wildlife Refuge won’t make the slightest difference at the pump, ever." 

How can drilling for oil that won't appear for ten years change the price of oil now?  The answer is simple:  Because the the expected price of commodities in the future plays a huge role in the price of commodities now -- and the 'economic engine' that transmits those expected future prices to the present is that oft-derided character, the speculator.

The basis for this claim is that any discrepancy between prices creates opportunities for profit, whether those price discrepancies are geographic, technological or temporal.  As long as storage costs are minimal -- and there's no more minimal storage cost than keeping your commodity in the ground -- lower expected future supply will mean higher prices now, whereas higher expected future supplies  will mean ... well, you can either do the maths, or see how the argument works with beer.

 As Robert Murphy explains:

If we step back and survey the big picture, what would happen is that the market in a sense would be transferring some of those future [Alaskan] barrels to the present. It's true, the market doesn't have recourse to time machines. But physical barrels of oil that would have otherwise sat underground in 2008, 2009, and so on, will now be brought to the surface and sold, because they have been displaced by the barrels currently buried in Alaska that will be brought to the surface and sold in 2018, 2019, and so on.

Simple, as I said.

But it's not just economic ignorance that is opposed to new drilling in Alaska and the Gulf of Mexico.  As Jeff Perren points out, there's also the political ignorance of members of Congress who think they have the right to dictate when, where and how any oil company should search for or extract oil -- and naturally there's environmental ignorance too: the misbegotten notion (for which the economic and political ignorance are just the facade) that these physical locations and their biota have 'intrinsic value' in and of themselves, whereas human beings and all our enterprise doesn't.

Whatever economic arguments are put up, that is the real motivation of opposition to new oil -- that human beings and all our enterprise, including our 'addiction' to oil, might just continue to flourish.

UPDATE:  I liked this comment at Hit and Run, which puts the 'intrinsic value' nonsense in context.

We could see how much people truly value pristine wilderness if the government would sell off ANWR.. If the Sierra Club outbids Exxon for the land, then it turns out they value it enough to prevent drilling. If you dont want the government selling it all off, they could just auction off the oil drilling rights...

As Ayn Rand pointed out, you can't  have a value without a valuer -- which makes complete nonsense of the very idea of so called 'intrinsic values.'  "The conceptpt “value” is not a primary; it presupposes an answer to the question: of value to whom and for what? ...  Material objects as such have neither value nor disvalue; they acquire value-significance only in regard to a living being—particularly, in regard to serving or hindering man’s goals."

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2 Comments:

Blogger Matt Nolan said...

"Because the the expected price of commodities in the future plays a huge role in the price of commodities now"

Indeed. The way I see it, leaving oil in the ground is like investment - so if the future supply is going to be higher, future prices will be lower, so the expected return on that investment will be lower - which will lead to less of it.

In turn that implies more production now, and so lower prices now - wooohooo!

7/30/2008 11:54:00 am  
Blogger Jeff Perren said...

Well, "ignorance" is one way to put it, I suppose. The type of "ignorance" that results from a self-performed (moral) lobotomy.

7/31/2008 01:36:00 pm  

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