Tuesday, August 23, 2005

What high prices do

This article nicely summarizes responses to the oil price increases worldwide:

Adam Smith and oil prices. Nod to Cafe Hayek for the reference.

Just to summarize some of these responses:

  • In Libya, which has some of the biggest untapped crude reserves in the world, lifted sanctions and the prospect of getting $60 or more for a barrel is helping induce Chevron, Marathon and numerous others to open millions of acres for drilling.

  • Exploration is also creating jobs and expanding supply in Russia, Angola, China, Algeria, Britain, India, Canada, Azerbaijan, Nigeria, Poland, Malaysia, New Zealand and Trinidad and Tobago, reports Oil & Gas Investor.

  • The profit signal sent by $60 oil is so strong that last month the number of exploratory rigs around the world hit its highest level since 1986, says Baker Hughes, the petro services company.

  • Capital projects are booming in the equipment and "downstream" sectors, too. Companies in South Korea, China, Singapore and the United States are addressing a drilling-rig shortage by building new hardware.

  • Chevron is expanding its Pascagoula, Miss., refinery by a fourth. Kinder Morgan and Sempra want to spend $3 billion on a pipeline bringing natural gas from the Rockies to the Midwest and East. Texas-based Valero and ConocoPhillips are spending billions to improve their ability to process sour crude, which is cheaper than sweet and will help bring down prices.

  • Thai Oil is spending $1 billion on new output capacity. Brazil just announced plans to increase processing capacity by 20 percent. China and India have doubled refining capacity in recent years.

Think about it: high price is an incentive to produce more. Common sense economics is vindicated - again.

On a related note: Senator Mar Roxas has wisely criticized some of the conservation policies of the government. In particular:

Roxas said the recommendations, including shorter mall hours, do not require emergency powers. People's “natural self-interest lead to conservation measures.”

Gas rationing, he said, may be a worse cure to the problem as it might spur a black market for ration cards.

Just one remark on Roxas statement - it's not just the black market which is the bad thing about the rationing. The black market is the response to the bad thing about rationing. And that bad thing is the rationing. You ration becomes supply is low relative to demand, but you restrict price from correcting demand and supply imbalance (i.e. consumers to conserve on energy out of self-interest, suppliers to produce more oil out of self-interest.) Not only have you depressed supplies, you have also spawned a lot of unsatisfied customers. Which customers are willing to begin a bidding game against other customers - hence the black market.

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