Friday, December 11, 2015

OIL!

     Suppose your neighbors have a fire sale and put their furniture on the market at extraordinarily low prices?  What you should do is buy all you can – not match their low prices.  We have reached that point in the case of oil.  For whatever complicated strategic or political reasons, countries like Russia, Saudi Arabia, Iran and many others are intent on selling oil at bargain basement prices.  Perhaps they are struggling to maintain a fixed level of revenue.  Whatever the reason for their actions, the rational response is to buy as much as possible.  American companies should leave their shale oil in the ground.  The world stock of reserves, as measured by British Petroleum, is only 40 times the world’s annual usage.  This means that eventually, though it may be a decade out, having large oil stocks will be valuable both economically and from the standpoint of national defense.  In fact, if the major producers today dump their stocks at bargain prices while American firms leave their oil in the ground, the US may be a leader of “OPEC” in the future.  Seen in this context, removing legal restrictions on exports of oil is the right thing to do from the standpoint of fairness, but will have little economic impact.  Why would American producers want to export when the current OPEC is flooding the world with cheap oil?  The wise thing to do is to cash in on the bargain by buying cheap oil now and then win again as the commodity becomes more scarce and the US stock becomes more precious.

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