Follow this link to an item that purports to explain why oil companies don’t drill. This article was recommended to me by Richard H.
I think this explanation makes a lot of sense to me. I have read similar items before. Also, in George Soros’ latest book, he explains some of the problems with the theory of supply and demand. I always chalked these problems up to the fact that supply and demand is an explanation of a static situation. During a period of large change, the system has not settled to a static equilibrium that static supply and demand curves might predict. I think this article and George Soros’ book are are agreeing with the part of the problem that I have identified, but George Soros adds other details that I had not thought of.
As for oil specifically, there is one issue that I would like to see discussed. While it may be true that there are a lot of oil leases that the oil companies are not exploring, this might not be a fair reason for not opening up other areas for drilling. It could be that the leases that the oil companies are not actively exploring are not as attractive as the ones that are currently off limits. I am not a proponent of opening up more areas for drilling. It is just that if we are going to have a discussion of the issue, I would like all sides to be honest during the discussion. If either or both sides are obscuring the truth, then how can we come to a rational decision after the discussion?
Regarding your post:
I think there are two points to Seto’s post:
1. Here are some reasons why oil co’s are not producing.
2. If oil co’s are not going to respond to tax incentives to produce,
stop giving them incentives which simply line their pockets.
> > “After all, if oil companies are not responding by increasing
> > production, those breaks are just gifts from you and me to Exxon.”
You mention #1 but I think you should emphasize to your audience #2.
[Parenthetically, back in 1976 when I was a professor at Simmons, I
got a call from someone at a DC think tank (ICF?) asking why oil co’s
were not pumping oil out of their fields when to do so was clearly a
positive NPV decision. I said that there is an option pricing reason:
When there is increased uncertainty (volatility) of a stock’s future
price, a call option on the stock becomes more valuable … and the
option is worth more ALIVE than it would be if you exercised it
immediately. Pumping out the oil today is like exercising an option
today. There is more to be said about this line of thought but this
is the gist of what I said.]