«
»

Dumbest Thing I Have Read Today

April 11, 2008, 9:06 am

I agree with Kevin Drum, this is the dumbest thing I have read today:

There is a solution to the rising cost of oil, but it is a painful
one. Let's say there is a lot of $20-a-barrel oil in the world "”
deep-sea oil, Canadian tar sands. But who would look for $20-a-barrel
oil if someone else (Saudi Arabia) has lots of $5-a-barrel oil? The
answer is: no one.

Basically, American taxpayers have to guarantee potential producers
that the price in the future will not fall below $20 a barrel and that
they will not lose their investments.

This is easy to do. The U.S. needs to guarantee that it will buy all
of its oil at $20 a barrel before buying anything from OPEC. This
forces the price of oil down to $20 a barrel, but it eliminates the
possibility that it will ever go back to $5 a barrel.

The implication that no one will add capacity if there is anyone at all to the left of them on the supply curve is just silly, and defies history in any number of industries, including oil.  By this argument, no one would be building super-deep water oil platforms today.  The reason there is not more oil exploration today in certain areas of North America is that there are formal and informal government restrictions that make it hard and/or impossible.  And to the extent that oil companies are treating current oil prices as a bubble that will inevitably fall, all I can say is, bring it on. 

Tags: , , , , , , ,
Category: Economics
  • Kevin Dick

    Not to mention that there are any number of _private_ investment banks who will put together a nice hedging instrument to reduce your exposure to future oil price drops.

  • http://comuse.blogspot.com Allen

    I think the McCain quote on sub-prime was worse.

    Sale price guarantees for producers would help reduce risks. It would make things more likely but, as you pointed out, it's not as though cheap oil didn't preclude such projects in the past.

  • http://sailorette.blogspot.com/ Foxfier

    Yeah! That's the ticket! Because Wal*Mart won't sell jeans for under $100, because that's how much some other people are getting for jeans!

    ...

    Wait.....

  • Frederick Davies

    Some would think that after the great success that price controls and other mandated government interventions on market prices have been through History, people would learn not to make such stupid statements. As Einstein once said: "Two things are infinite: the universe and human stupidity; and I'm not sure about the universe."

  • markm

    How about a price-supporting import duty? For instance, a tax that is zero when the price of imported oil is above $80, or 25% of the difference between $80 and the price when it is below $80.

  • markm

    The real issue is that government action does much to discourage investment. It often makes it hard to get permits for investments in this country. It can support a price bubble and then change and help deflate it (the Carter years versus Reagan). And many politicians want to penalize forward-looking companies that risked major investments so they'll have the extra capacity when the price soars by taxing "profiteering".

    And the rest of the world is worse - investing in many countries is to risk that the government there will confiscate your investments. Also, governments collude to create monopoly pricing (OPEC), and then cheat and undercut those agreements.

  • http://www.tinyvital.com/blog John Moore

    While I am not necessarily for it, there is a national security argument to be made for subsidizing US energy "independence" (really a drop in imported oil). The high price of imported oil is a major national security issue - it is enriching hostile cultures and governments, while damaging our economy.

    The trick, as with anything a government does, is to keep the cure from being worse than the disease. I don't have a lot of confidence in government there - look at the insane ethanol industry (which is about to go bust unless the price of corn drops).