Monday, May 19, 2008

High prices are a disincentive to look for more oil

Oil bulls point to high production costs as one justification for higher prices. The idea being that high prices and therefore record profits provide the incentive to find new resources and bring them on stream so that today's insatiable energy needs can be satisfied. It is a brilliant logic easy for everyone to understand. Of course, if you are a skeptic and you don't believe everything that is coming out of the pits, you might just take the other side. In search for this very other side a paragraph in a Bloomberg article, "Not Enough Oil Is Lament of BP, Exxon on Spending", caught my attention. It confirms what I had been suspecting for quite a while. High prices provide actually a disincentive to look for new resources. This helps twofold, by preserving capital and keeping OPEC's charade alive.

Even as countries reclaim their reserves, many are relying on high oil prices rather than increased production to meet government budgets. Output in Russia is expected to fall for the first time in a decade, and Saudi Arabia's decision this month to increase output by 300,000 barrels a day still won't offset a 390,000 barrel-a-day drop in monthly OPEC production in April.

I have linked to the Bloomberg article, but have not done any research myself about their numbers and their significance. I have chosen the above paragraph for the purpose of making a specific point.

source: Not Enough Oil Is Lament of BP, Exxon on Spending (Update1)
By Grant Smith and Jim Kennett

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