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Thursday, September 24, 2009

Finding More Oil

A front page story in the September 24 New York Times focuses on new oil discoveries. As the piece opens, “The oil industry has been on a hot streak this year, thanks to a series of major discoveries that have rekindled a sense of excitement across the petroleum sector, despite falling prices and a tough economy.”

The entire article is a must read, but the following key points are worth noting:

• “These discoveries, spanning five continents, are the result of hefty investments that began earlier in the decade when oil prices rose, and of new technologies that allow explorers to drill at greater depths and break tougher rocks.”

• “More than 200 discoveries have been reported so far this year in dozens of countries, including northern Iraq’s Kurdish region, Australia, Israel, Iran, Brazil, Norway, Ghana and Russia. They have been made by international giants, like Exxon Mobil, but also by industry minnows, like Tullow Oil.”

• “While recent years have featured speculation about a coming peak and subsequent decline in oil production, people in the industry say there is still plenty of oil in the ground, especially beneath the ocean floor, even if finding and extracting it is becoming harder. They say that prices and the pace of technological improvement remain the principal factors governing oil production capacity.”

What’s the deal? It’s called the market at work. As noted in the piece: “‘That’s the wonderful thing about price signals in a free market — it puts people in a better position to take more exploration risk,’ said James T. Hackett, chairman and chief executive of Anadarko Petroleum.” Mr. Hackett correctly explains the economics – prices and profits play critical roles in directing investment.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

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