Wednesday, May 21, 2008

Government Stupidity

"A windfall profits tax would prevent oil companies from increasing supply because it would disincentivize further production. We need these companies to increase production, not decrease production if we want the supply to increase", Frank Stalzer letter to the WSJ, 8 May 2008.

"The first windfall profits tax, passed in 1980 (It was repealed in 1988), caused more devastation than a loss of 3% to 6% in domestic oil production. The industry never recovered. ... That wasn't all the devastation: the impact on the oil servicing industry was significant as it reduced that industry's investment as well. Many just closed shop never to return. There were about 2,000 active drilling rigs working in the U.S. during the 1970s. Their number dropped to around 800 during the 1980s. The rig count has returned to 1,700 now, but that's not enough for the work that needs to be, or should be, done. ... The cost of replacing reserves not only increases due to inflation but also due to drilling in more difficult places and formations. Major oil companies need to administer their businesses on the basis of true replacement costs, not historical accounting costs", David McElevain (DM) letter to the WSJ, 8 May 2008.

"Myanmar's badly conceived agricultural policies are compounding the country's already dire food situation. In recent years, Myanmanr's reclusive military rules have plowed large tracts of rice--and vegetable-growing land to plant jatrophia--an inedible plant used for making biodiesel. ... And villagers in the highland regions are often given rice strains requiring expensive fertilizers that they can't afford. ... Now the folly of such policies is becoming apparent in the wake of the cyclone that devastated the country last weekend. ... The most notorious example of errant policy making refelcts the fascination of 75-year-old junta leader Senior-Gen. Than Shwe with biodiesel as a way to break the country's dependence on expensive imported oil. ... 'This was the whitest of the junta's white elephants,' says Monique Skidmore, a professor at the Australian National University and an author of two books on Myanmar", WSJ, 9 May 2008.

Stalzer doesn't even need to be a Havard economics professor to understand this.

Boy is DM right. Politicians can never seem to understand the concept of marginal cost. In the oil industry, marginal cost is the cost of the next barrel you find, not you lift. Current reserves are a stock, not a flow number. Marginal cost is not just lifting cost of existing reserves. Don't feel too bad. Uncle Miltie blew this one in 1973. I remember. It wasn't until about 1976 that he realized it. But Uncle Miltie was an intellectually honest guy.

Myanmar should get out of the business of "managing" its economy. As should Uncle Sam.

No comments: