What Are We Going to Do About Oil?

"I believe that most of us agree on one thing: Prices are too high at present," said U.S. Energy Secretary Samuel Bodman. "And unless we act, the situation will remain unsustainable." (Emphasis added.)
-- The Wall Street Journal, June 23, 2008

I've read a lot of nonsense in the energy arena lately, but this may take the cake.

Honestly, I'm not even sure where to begin. How about this: The word unsustainable implies that something can't go on indefinitely. Joe DiMaggio's hitting streak comes to mind. Another example is a commodity price rise that wildly outpaces the marginal cost of production. A trend that is unsustainable cannot remain so, by definition.

If the ongoing oil surge were sustainable, then refiners like Valero (NYSE: VLO  ) and petrochemical giants like Dow Chemical (NYSE: DOW  ) might as well close up shop, because they'll never see margins expand again. That, and the Energy Select Sector SPDR (AMEX: XLE  ) exchange-traded fund is a screaming value near its all-time high, since producers like Apache (NYSE: APA  ) and Devon Energy (NYSE: DVN  ) will just keep cranking out record cash flows in perpetuity.

I think Bodman is right, however, to identify the price explosion as unsustainable. It's unsustainable because demand destruction will ensue -- more slowly in subsidized markets like China than in the U.S., but it will happen. It's unsustainable because higher commodity prices drive today's frantic pace of exploration and development that's pushing the technical capabilities of drillers like Transocean (NYSE: RIG  ) and servicers like Halliburton (NYSE: HAL  ) to new heights. Finally, it's unsustainable because those high prices drive entrepreneurial innovation in alternatives such as solar and biofuels.

Politicians, of course, tend to fall under the same spell as active stock traders. The trading adage, "Don't just do something -- sit there!" is unfortunately one that's unlikely to be embraced in our nation's capital anytime soon. Today, our elected representatives are scrambling to do something about these prices that, by our energy secretary's own admission, are unsustainable. Now that they're in such a rush, let's hope our friends on Capitol Hill don't do anything half as silly as their rhetoric.

Think oil prices will keep pushing higher? It's a popular position, based on the Energy SPDR's five-star ranking in Motley Fool CAPS. Weigh in with your sector bet right here.

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Fool contributor Toby Shute is ranked 110 out of more than 110,000 CAPS players. You can read his profile and blog posts. Toby doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 24, 2008, at 11:28 AM, pondee619 wrote:

    "What Are We Going to Do About Oil?"

    NOTHING

    Until it becomes cost effective to place a solar power array on each and every rooftop;

    Until we DEMAND that a wind turbine be placed in our neighborhood;

    Until nuclear reactors become as common place as coal/gas/oil fired generators;

    Until rush hour no longer means that the highways are backed up with automobile traffic, but that the trains are full and regular;

    Until it is cheaper to take a family of four on a trip by train than it is to drive;

    Oil is still the cheapest form of energy. Until then, there is nothing to do.

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