Byrne's Eye View

Congressman Nick Rahall demands that oil companies "use it, or lose it": he wants them to forfeit any oil lease they aren't using, and not to be awarded any new leases.

Is there some kind of standardized test that only admits people to the House if they show economic dyslexia? This idea is ridiculously stupid. Example: let's say Exxon has a lease that is, currently, just-barely-economical; they can extract oil for $125/barrel (including overhead, depreciation, etc). But they're also aware that new technologies they're prototyping now will allow them to extract it for $50/barrel in five years.

Normally, they would do the sane thing and wait -- they own the lease, but the sensible thing to do from the global economy's perspective is to exploit it when it's maximally profitable, not the second they own it. With this bill, they'd be drilling and extracting (and polluting, and moving more capital from non-energy to energy investment, hurting the rest of the economy) in order to do the right thing at the wrong time. They might even realize that drilling is unprofitable now, but will be profitable in the future -- they could end up pumping oil, then dumping it somewhere because it's not worth selling, solely so they can keep control of the assets they own long enough to use some of them sensibly.

The kicker: many people are angry about the fact that oil has suddenly gone way up in price. Economic theorists say that this shouldn't happen, because if oil is expected to go up in price, oil companies will just slow down their drilling -- if their oil-in-the-ground appreciates at 10% each year, it's like a high-yield bank account. But of course if enough of them do that, current oil prices rise(supply has dropped) and future prices drop (supply is higher) until oil is ready to appreciate at a rate that makes companis indifferent between extraction-cost-now-oil-later and oil-now.

There are ways to mess this relationship up. One is to give people a reason to think that they won't control their oil in the future (so it's better to pump now and take the money than to wait for more money they might not get). This is what happens to Russia and Nigeria. Many commentators seem to think that the pressure to show high quarterly profits is equivalent -- that somehow, these companies are controlled by sinister executives who take advantage of their economically uninformed shareholders by producing high short-term profits but sacrificing long-term growth.

Perhaps. But I can't help but notice that the oil industry is run out of Houston when prices are low, but run by Washington when prices are high. And somehow, executives with twenty-year tenure over immortal corporations have a longer-term outlook than politicians up for reelection every few years. We now have a system in which oil is a business when the oil business is unprofitable, but oil is a populist piggybank when we need the industry most. This is the worst imaginable way to run things.

By the way

According to Wikipedia, Rahall's sister is paid $15,000 a month by Qatar. Rahall is a big fan of Qatar, incidentally. Although he wins in a landslide every race, some may be interested in the campaign site of Rahall's opponent, Marty Gearheart. There is a 'donate' button.