Posted by
Andrews on Wednesday, July 23, 2008 9:51:29 AM
Recently, the main argument against the idea that supply and demand is causing the price increases, and the argument against opening up new areas for drilling is that the oil companies already have leases on X million acres, so why do they need more?
This reminds me of the 1970's, when reporters would go to tank farms, stand in front of them, point out that the tanks were full, and then spin endless conspiracy theories about how there was no oil "shortage" since the tanks were full, and that the rise in prices was clearly part of some conspiracy on the part of "big oil". Looking back, we all can agree there really was a shortage in the 1970's, full tanks notwithstanding, and that this was all just demagoguery on the part of newsreaders masquerading as populist rabble rousers.
And I think in thirty years our pleas that "we can't drill our way out fo this" and witch hunts for "windfall profits" and "speculators" will look just as misguided.
I already explained why I think this shortage is nothing more than a market response, a simple matter of supply and demand, so I won't go into that here. What I do want to address is the subject of oil leases. Because they are the modern version of those full tanks. That is, something meaningless which people take as a sign that the "official story" is wrong.
Leases do not mean the oil company has a spot with both proven oil and the ability to drill. Many leases are bough preemptively, in areas with a relatively high probability of oil, but before real exploration confirms oil is present. Why? To keep other companies form leasing the same area? Because they need the lease to do exploratory drilling? Because it is cheaper to lease before oil is proven present? There are many reasons. So not all of those leases even represent proven oil. Many do not cover oil rich regions.
Then there are political problems. Many of those leases give the right to drill, but that does not mean that the appropriate government authorities will allow them to drill. Oil companies probably have old off-shore leases as well which are being counted in this number, but do they mean the companies can drill there? Of course not. Yet it is probably being counted against them in this argument anyway.
Then there are leases such as those from the BLM. Many of these leases pay exorbitant royalties to the government. Royalties in some cases high enough to make drilling economically unfeasible. So why take such a lease? First, to do the exploratory drilling. Second, because it is possible during the life of the lease prices may rise high enough, or inflation devalue the dollar enough, that the lease will become economically viable. Admittedly, that is a bit of a long shot and few such leases exist. But there are some, and they too are being counted against the oil companies.
Finally, there are leases which are available for drilling which are not yet being drilled. Some may be drilled in the near future, but it takes time to open new wells. Others may lack local infrastructure, or a local work force, or may simply require too much investment for the likely return. It makes no sense to spend more to get oil than the well will eventually produce.
All of which says nothing about whether or not we should open ANWR or off shore drilling. The leases are themselves meaningless. Yet time and again they are mentioned as proof that there is no lack of supply, or that opening new fields is meaningless.
But the extant leases mean nothing of the kind. As I said, they are like those full tanks back in the 70's, nice window dressing for a complete lie.
POSTSCRIPT
My most recent thoughts on oil can be found in the following articles:
In Defense of Speculators
Authoritarian Oil Talk
Stop Big Porcelain Now!
A Shortcoming of Conspiracy Theories
Those Darn Speculators
Absurdities on Oil
Oil Speculation?
A Brief Comment on Oil
For older articles, you can check my
blog index, though it presently covers only through May 5, 2008. I hope to update it soon to make it a bit more current. (I know I can tag articles with subject descriptions, but going back and tagging 55 pages of articles is a daunting task.)