Streetwise Professor

October 23, 2012

And the Clueless Will Rule Us

Filed under: Economics,Energy,Politics,Regulation — The Professor @ 6:10 pm

In an effort to defend Obama’s debate #2 defense of his energy policy, Ed Markey, Dim-I mean Dem-MA is scandalized that 20 million acres of leases in the Gulf of Mexico are not being drilled.  (H/T Jim O.)  This part is priceless:

Markey’s study added that about half of the leases have been idle for at least five years and that 80 percent of the idle leases were purchased for less than $300 an acre.

So Ed is mystified that the really cheap leases are disproportionately idle.  I guess he would also be Shocked! Shocked! that deep out-of-the-money stock options are not exercised: why would someone buy a call on Apple struck at $2000 and not exercise it?

But that’s exactly what’s going on here.  The cheap leases are the marginal properties.  The way out-of-the-money development options.  Buyers are willing to pay a little for such properties, on the outside chance that either market developments (e.g., a huge rise in oil prices), or a technological shock (a new drilling method that makes previously inaccessible properties economic to develop), or a new piece of information about the property itself will make it economical to drill on it.

Voyaging into Ed’s head-a rather frightening journey, but anything for you loyal readers!-I imagine he thinks that the companies who leased these properties got a steal.  Hey-they’re cheap! Only $300!  Why don’t they drill?

Memo to Ed: cheap is cheap.   Note that 131 companies compete to lease in the GOM.  Given that competition, the price paid for leases is about the best estimate of value you can get.  That price reflects the option value, and the deep out-of-the-money drilling options will command a low price-and will be developed with very low probability.

But Ed knows better.  And O does too.

Yup.  The clueless presume  rule us, and do so with an infuriating amalgam of ignorance and arrogance.

Print Friendly, PDF & Email


  1. Professor don’t assume that Markey and P. Obama are in search of the truth especially when it doesn’t fit their narrative. Markey is acting in concert with a Joseph Goebbels principle in repeating a lie enough so that it becomes the truth.

    Comment by Bob — October 23, 2012 @ 7:38 pm

  2. Without an energy policy it makes no sense for the administration to take issue with the fact that energy companies are acting in a manner inconsistent with the common good. If the administration want the GOM to be drilled, then it would be good policy to offer short term leases that expier if not drilled so the acreage changes hands until a lessee is found that will drill the acreage. If the administration doesn’t want the acreage to drilled (for environmental reasons) then it makes sense for the acreage to stay in the hands of a lessee who has shown a reluctance to drill. Since the administration has no energy policy, it makes no sense for Markey to take issue with the actions of any lessee.

    Comment by Charles — October 23, 2012 @ 11:57 pm

  3. I just taught this concept in a course (with Texan oil examples!) so I’m glad to see it in the news… thanks.

    Comment by Jack — October 24, 2012 @ 3:17 pm

  4. […] When politicians get confused about […]

    Pingback by Further reading | FT Alphaville — October 25, 2012 @ 1:20 am

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress