Why has oil production been so slow to respond to higher prices? Since 2003 prices are up 3 ½ times. We’d expect companies to look for oil everywhere. The returns would be there. So what gives?
First, the oil companies have been pretty pessimistic when it comes to prices. Many of them have forecast future crude prices of around $60 / barrel. That would imply pump prices of less than $3. We wish. But if you’re paying a $100 million for an offshore rig, you need to be careful with your planning.
Second, governments often look at the oil companies as piggy banks that they can smash and withdraw cash from at will. From presidential candidates proposing windfall profit taxes to Canadian provinces raising lease payments, the political risks of the energy business have increased dramatically.
Conservative corporations and greedy politicians have slowed the oil supply response. Now we’re all paying for it. Supplies will go up. We just don’t know how soon.
Douglas R. Tengdin, CFA
Chief Investment Officer
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