Friday, October 17, 2014

1397 Oil's Well



Let’s see if we have this straight:  Oil has become plentiful.  And prices are on the low side.  But demand is shrinking and we expect a price increase?

Doesn’t that violate some famous principle of economics?  Aren’t overstocks supposed to sell cheap?

Well… like many of those things we all know for sure, guaranteed, wrapped up, done, finished, here’s another one that’s not always true.

But, but, but… Adam Smith says it has to be so.  Didn’t Paul Samuelson… and he won the Nobel Prize? And Ludwig von Mises, the darling of the libertarians?

Joe has too many t-shirts and they’re cluttering up his warehouse.  So he knocks down the price, and bingo, they’re gone.

But not oil?  Too much production and the price is going to rise?

Yes, but.  Here’s the thing:  when the supply is too high the usual suspects will reduce their production. Presto, they kill some of the supply. So far, so good, right?

Then comes the United States, now among the world’s biggest producers.  This country’s huge oil output comes from shale. Fracking.  Which costs a lot.  So even though there’s plenty, we don’t benefit from supply and demand.

Oh, and there’s something else:  When they find oil from shale, the first few years the oil flows like Niagara.  After that, they have to frack deeper and deeper for less and less output.  That costs more. So… up go the prices.

Did you know that years and years ago, congress declared the byproducts of oil fracking are not hazardous?  But they can be.  So… a political decision based on no science.  And here you thought disbelief in science was something new the right wing cooked up.  Nope.  It’s been with us all along.

Environmental laws don’t apply.  Getting rid of that “non-hazardous” effluvia therefore is “no problem.”  Just put that slag anywhere, boys.  Not too near a river.  Unless it’s inconvenient or expensive to ship it farther away.

And don’t worry too much about the price increases either.  We’re used to paying four bucks a gallon for gasoline.

This problem eventually will find its way to natural gas fields, too.  So right now, gas is dirt cheap.  But ten years from now, watch what happens.

Good thing they don’t have to frack for water, else Perrier would be a bargain.

Energy independence has its price.

Shrapnel (Eboling for Dollars Edition):

--Ebola in Texas?  Maybe we won’t have to build walls on the southern border to keep Mexicans out.  Mexico will build walls to keep Texans out.

--Speaking of border closings, why haven’t we stopped letting people from Ebola- rich countries into ours?  Not permanently, but until this thing dies down?  That worked okay with Sars and Bird Flu.

Grapeshot:

-Eboling for Dollars… and the money -- charitable donations -- is not coming in, which is unsurprising… but where is Larry Kenny when you need him.

(Note to younger readers Kenny was NY-area host of “Bowling for Dollars.”)

I’m Wes Richards. My opinions are my own but you’re welcome to them. ®
Please address comments to wesrichards@gmail.com

© WJR 2014

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