Saturday, September 03, 2005

the oil scare

Hawaii is the first to attempt to cap gas prices. It sounds like the local government needs some lessons on the basics of supply and demand. The Government can not effectively control markets. The legislature tried to use some common sense by saying they would account for market forces in the adjustable price cap. Their way of allowing themselves a loophole out of the disaster this intervention will cause. The real question is what will happen. Hawaii has only 2 refineries. Will one shutdown? Will they reduce their quality? Will they take shortcuts to save money? Will we run out of oil? It should go without saying that they will not be investing in any new equipment or improvements to their current operations when they can do it else where with far more profits. The worst scenario is if this seems to work for a few months, or even a few years and then the refineries break down due to neglect and lack of capital investment. Then it won't be a quick fix and we will have shortages.

But, I doubt that will happen. If people will just be patient supply and demand will balance out. A little known fact is that the largest known fossil fuel deposits in the world are in the US (that is 1,000,000,000,000 barrels). With an estimated cost of production of 30$ per barrel.

A little common sense would make people realize we have only explored a small fraction of the Earth for oil. There is no foreseeable shortage and emerging technologies are allowing us to tap into oil in once unheard of places. The Alberta oil sands in Canada is the 2nd largest reserve in the World. Combined with the oil shale in Coloroda this has dropped the OPEC cartel to a measly 10% of World production. This is important to allow market forces to drive oil cost, not Saudi Princes. Canada may be in trouble due to its signing of the Kyoto treaty and may be limited to how much it can produce, luckily the US didn't fall for that bit of hyperbole.

As long as market forces are allowed to act freely and more drilling is allowed on government land supply and demand will balance out and prices should stabilize. The bad news is that this will take years since we have only recently started tapping into our own resources.

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