Tuesday, June 12, 2012

Domestic Crude Oil Lowers the Risk Premium

Mark Maddox, former senior official at the Department of Energy and now an energy fellow at the American Action Forum, makes several good points today in his Washington Examiner editorial:
"In our national debate over domestic oil production, too much time is spent discussing whether more production can lead to oil independence and too little time on the potential impact on liquidity in global oil markets. Lost in the back and forth is the fact that increasing domestic production by any amount increases spare capacity globally and lowers the risk premium.

In the debate over how, when and where to produce energy, it is critical that policymakers ask the right questions. Rather than debate whether America can become an energy island, they should be asking whether we can raise domestic production in order to minimize the inevitable [supply disruptions] and to ensure a relatively stable global supply and price for oil." 

Bottom Line: Supply matters. 


At 6/12/2012 1:04 PM, Blogger juandos said...

'In the oil world, a Magoo can come in the form of Nigerian pirates, civil wars, sabotage, major accidents and random political acts such as industry nationalizations (this happened most recently in Argentina)'...

Hmmm, considering how choke points like the Malacca Strait or the Strait of Hormuz for instance could be closed down or severely constrained by a small number of people in cheap power boats and a couple handfuls of RPGs gives domestic production a whole new value...

At 6/12/2012 3:01 PM, Blogger Rufus II said...

Finally, a "sensible" oil/energy post.

At 6/13/2012 8:24 PM, Blogger VangelV said...

Bottom Line: Supply matters.

It does but the declines in price have come due to a collapse in demand, not new supply. The supply of light sweet crude peaked more than half a decade ago and is not getting back to previous levels no matter how many $10 million wells that produce 100 bpd you drill in shale formations.


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