Friday, June 20, 2008

How Drilling in the Future Helps Now

(Cross posted at TheNextRight)

Democrats are almost uniformly lockstep in their opposition to increased domestic oil and gas production. "We can’t drill our way out of this," they say. "Those projects won’t bring any oil to the market for years," they say. But if all the complaints about rampant speculation are true, then approving increased production will help prices now even if the oil takes years to come to market.

How? The price of oil now has increased in response not only to current supply and demand, but to the idea of peak oil theory - that we are nearing the maximum amount of daily oil production. Prices are responding to the idea that there isn’t much, if any, incremental supply to add to the market, and that oil will get increasingly scarce starting right now.

A recent column by Kevin Hassett on Bloomberg described how Milton Friedman saw speculation as a good thing. Price speculators are smoothing the price curve and giving the market a signal about future supply. Consumers should conserve and producers should increase supply. Hassett writes, "Friedman's logic is irrefutable. If speculators are, as is popularly believed, brilliant tacticians who are making a killing, then their activities are stabilizing. Speculation is good."

If Congress approves increased domestic production, then the fears about peak oil will be delayed as the expectation of future supply works its way into the futures markets, and the parabolic price moves in energy will retreat. It isn't a permanent solution, but it does help right now.

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