Thursday, May 27, 2010

Obama’s Drill Baby Reasons don’t meet the economic test

The President is not an economist. The idea that drilling in U.S. waters will reduce dependency on foreign nations is absurd. Excuse the pun, but oil is fungible. What is brought up in the waters off shore goes into the world market. Now consider the cost, not only of oil drilled a mile beneath the Gulf, but also the indirect cost of leaks and spills in delicate areas. Economic theory states that price is based on marginal cost. The most expensive product that clears the market determines the price for the market as a whole. The lower cost product (Saudi oil) gets a premium since it is cheap to produce. No wonder oil companies want to drill the paltry amounts of off-shore US oil. As this oil comes to market with its high cost, the price paid for less costly production earns a significant premium.

The cost of oil brought up from the near surface wells in the Middle East is by far less costly and less environmentally challenging than that from the Gulf. True, the U.S. MIGHT get some royalty income from the leases if the Interior Department can get its act together to collect this income. But this oil will not make a dent in our use and there is no reason to believe that the oil drilled from offshore will reduce our out of pocket cost-in fact such payments will probably increase since the oil produced off shore is the most costly oil to produce on the market.

A sound energy policy should not have as one of its facets the cost-ineffective off shore drilling that has led to making the Gulf of Mexico an oil tanker, polluted shorelines and sickened inhabitants of Louisiana, many of whom do not have health insurance.

There is a superabundance of finance experts in the Administration. There needs to be a stable of experts on strategic markets, like oil.