Taken for a ride on oil
Interesting speculation in a column on oil, from an investor’s perspective:
Has “peak oil” been postponed? We have seen a sharp fall in the price of a barrel of crude oil … [to] under $70 per barrel … after … a new closing high of $78.21 as little time ago as August 1.
He proceeds to cite a whole bunch of reasons why we’ll get $66.60 for Christmas. But I reckon he’s wrong. I have a theory. It’s not a very big theory, or a very complex one. But it is my theory.
He’s wrong not about the price prediction, but about the reasons. The real problem, cited elsewhere in the same publication, is that the US government has been taking a large monkey-wrench to demand and supply:
Ten committees spent months hammering out the House’s 888-page energy bill, which will provide long-term incentives, capital investment and other types of support for a wide range of alternative energy resources and technologies, including solar, wind, ocean and geothermal power, biofuels and carbon capture and sequestration.
A Renewable Energy Standard (RES) amendment to the House bill introduced by Rep. Tom Udall (D-NM) requiring electric utilities to incrementally increase the percentage of electricity they produce from renewable sources from 2.75% by 2010 to 15% by 2020 passed by a 220-190 vote.
So first the government proposes to use taxpayer money to compete with the private sector to produce something people claim they want, but won’t offer a fair price for. Sounds altruistic, except that those who do get subsidised won’t face market pressure to improve their products or minimise their costs, while private competitors not blessed by government largesse won’t be able to come up with better ideas, new technology or clever innovation. By using actual risk capital, they will never be able to compete on price with the public money tree. So the government’s heavy-handed tinkering risks killing the golden goose of progress.
Then, when government suspects that even despite the subsidies energy producers might not be keen on untested, inefficient alternatives, it threatens using force if they refuse to buy what they don’t want. In the real world, that’d be a mafia tactic, called “extortion”. The government calls it progressive.
No wonder the oil price is all out of whack. I’d be too, if you adjusted me with a monkey-wrench. Oh well. At least the rest of us will be able to enjoy cheap oil while it lasts.
