Kevin Hassett argues that expanding oil drilling here in the U.S., now, can exert immediate downward pressure on oil & gas prices even though the product of the drilling doesn’t come “on-line” for several years:
. . . The economics of extracting resources is quite simple and intuitive. If you own property that has oil in the ground, then you have to decide how rapidly you wish to deplete your resource. If prices are low today, and you expect them to be much higher in the future, then you will hold off pumping a lot.
Open Spigot Now
If prices are high today and are expected to be much lower tomorrow, then you would rather open up the spigot now when profits will be higher.
If exploration can be expected to be successful and significantly increase oil production in the future, then it would cause producers to revise downward their estimates for future prices. This would increase the attractiveness of extracting more today. As producers respond with higher production, prices today would drop.
The argument that drilling wouldn’t influence today’s price rests on two possible assertions. The first is that exploration will fail. In that case, estimates of future prices would be unaffected by discoveries that won’t happen. The second is that current producers wouldn’t look ahead to lower future prices and increase supply today to maximize profits.
Both assertions are clearly false. . . .
More at Bloomberg.
{ 2 comments… read them below or add one }
Kleiglights 08.01.08 at 1:28 am
Whatever it takes, something has to be done, now.
The economy is sinking, fast, under the weight of Democrats refusal to allow drilling. And Americans are going to elect them in still greater numbers to continue plugging the spigots? What kind of idiots are voting for that? I am so angry about their refusal to attend to the national welfare that I could spit.
Jeny 08.01.08 at 1:33 am
But donchya know…..Ms. Pelosi is “trying to save the world”? *rolling eyes* *snicker*