Energy & Entrepreneurs #17                                                                                  

Even OPEC

by Raymond J. Keating

OPEC is a cartel of governments that controls about 40% of world oil production and two-thirds of global proven reserves.

Even given all of the problems with government controlling resources important to the world economy and the incentives working for and against cartel behavior, OPEC still responds to price changes in the marketplace in ways expected according to basic economics.  Prices are up, and that should lead to greater production and investment on the supply side.

According to an August 1 report ("Opec steps up search for oil and gas fields" by Javier Blas) in the Financial Times, that's what's occurring.  Consider the following points from the article:

• "The world's biggest oil producers have boosted their search for oil and gas to one of the highest levels in two decades as prices yesterday neared record highs of more than $78 a barrel."

• "...its members operated 336 oil rigs last year, an increase of 11.5 per cent since 2005, in response to strong demand from developing countries such as China and India."

• "The cartel's annual statistical bulletin shows that member countries were operating the second-largest oil rig fleet since 1982, when oil prices hit an all-time high in today's money of about $90 a barrel. US oil prices yesterday rose to $78.23 a barrel, just below the $78.40 nominal high."

• "The number of oil rigs in operation is seen as one of the best estimates of investment trends."

• "...the sharp increase in Opec's new investment could reduce the risk of oil demand outstripping supply and lessen long-term oil price pressures."

• "Saudi Arabia drilled 382 new wells last year, the highest number for any year since 1980."

• "Opec has said its members will invest up to $120bn in the medium term to raise output capacity. Saudi Arabia, Nigeria and Angola will lead the cartel's output capacity increases."

For good measure, the American Petroleum Institute recently reported the following about the U.S. oil and natural gas industry: "New investment last year (2006) reached more than $174 billion (a 29 percent increase from 2005), and between 1992 and 2006, the U.S. industry invested more than $1.25 trillion in a range of long-term energy initiatives compared to net income of $900 billion."

But more needs to be done. Key problems, though, come on the tax and regulatory fronts. Existing governmental costs present sizeable obstacles for energy exploration, development and production by U.S. energy producers, and now Congress is considering measures that would actually make matters worse. Proposed legislation would discourage energy development on federal lands, place delays on domestic oil and natural gas exploration and development, impose redundant regulatory requirements, and increase assorted taxes on oil and gas companies.

So, while various politicians complain about OPEC, they also are imposing burdens on U.S. energy companies. Does that make any sense? Obviously not.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.