"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.
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