Drill, drill, drill.
Sounds so simple, right? If you drill, you end up with oil. And if you end up with more oil, you will drop the price, right? The reason to drill has to do more with what people think than reality. What I mean by that is the drilling will cause people to think about the supply increasing, and you know what they say about a 1% oversupply to a market, even an illusion of one.
The question is, does drill, drill, drill really work? Can we get more oil? Are we going to end up with lots of extra reserves? Obama does not think so. He thinks oil is a zero-sum game, that there is only so much in the ground. But Obama is not an oil economics guy.
The quantity of reserves are calculated at a cut off of production cost. I do not know what that number is, but I doubt that it is over $35 per barrel. The thing about oil that then sells for more than $100 per barrel is it opens up a free market for capital, and for people to do stupid and risky things. Heck, Freeport is drilling 32,000 feet and going, and in only 70 feet of water. If you can get capital when you define a reserve at $80 per barrel cost, you might be surprised at what is found.
The Wall Street Journal: A famed dry hole gets a second shot (A WSJ online subscription is necessary to read the whole article.)
Stupid, risky things pay off in this business; rarely, but enough times to make the bets happen. And frankly, high oil prices will force the bets. People have to understand that if they hit a well at 35,000 feet, and it pays out, then the whole coastline will be dotted with rigs that will do the same thing, and that will change the supply dynamic.
Now the other option is to force high oil prices via taxes. That does not increase supply, but reduce demand. If this is the approach you take, the question is, what should the government do with the taxes? I would be willing to pay a $1 per gallon tax on fuel if 100% of it went into researching alternative forms of energy production. If you pour money at a problem, you will find solutions to something. Of course, the solutions may not be to the problems that got you researching in the first place. A research initiative into alternative energy production could, like the space program, completely change the world with the side effect inventions that come out of it. You cannot be sure that the solutions will solve the energy crisis, but 10s of billions of dollars per year being forced at research and development with a clear goal in mind would be interesting watch. I would want it to be a five-year program with a clear sunset.
For now, to get the rigs out looking, there is nothing like high prices to just raise the cash and get the drills turning. But Mr. Obama, if you want to sell me on changing energy policy, you’ve got to treat it like the space program and make it a war effort, and you might find some stuff. Just do not be surprised if you find a cure for cancer, or a 20-times-faster computer chip out of the spending, rather than a cheap form of renewable energy. If, however, you treat the new gas tax as a way to pay for social programs, I will be significantly angry.
