Almost five years ago, the Texas Rangers offered one player about $25 million per year over ten years. Some might claim that these contracts increase the price of tickets, but I’d rather suggest that it is our demand for the sport that creates economic rent for quality players. OK, A-rod plays for the Yankees now and I’ve never been much of a fan of their team.
The reason that I raise economic rents is the latest from John Tamny:
But ExxonMobil’s profits, and the rise in its stock price since oil hit a low of $10 in 1998, indicates very clearly that the markets are aggressively solving the existing oil shortage through the reallocation of investment toward the oil industry. To stifle or tax earnings would be to distort the process by which expensive oil will in time become cheaper. Back in 1980, in the midst of the last era of expensive oil, oil companies represented 28 percent of the S&P 500’s value. This investment boom stimulated exploration and led to an oil “glut” in the 1980s and ’90s. In this new environment, cheaper oil and lower oil-company profits meant that investment moved elsewhere, and with this asset redeployment, oil-company share of the S&P 500 fell to 7 percent.
Ah, no. There is a large difference between oil prices and the cost of producing oil, which is called economic rent. Large rents do not create more oil in the Middle East. And much of the swings in oil prices come from changes in the demand schedule – not outward movements along a very inelastic supply schedule. But won’t very high oil prices encourage more exploration. Tamny points to one example:
Also, record profits attract imitators and innovators. Canadian oil company Suncor Energy is an example of innovation at work. It has devised a way to extract crude from oil sands, and the consensus is that this process will greatly expand the amount of proven reserves around the world. Happily, investors have rewarded Suncor; its stock is up 400 percent over the last five years, a timeframe in which the Dow has been flat while the S&P 500 and Nasdaq have been down.
Suncor Energy’s 40-F filing notes that it for, acquire, develop, produce and market crude oil and natural gas, transport and refine crude oil and market petroleum and petrochemical products. Its Project Millennium doubled its capacity to approximately 225 thousand barrels of oil per day. Its proved and probable reserves of oil fell from 1.83 billion barrels to around 1.79 billion as extraction of oil reduced the estimated amount the company had in its oil sands mining reserves. Certainly high oil prices induce companies with high production costs to start providing oil when the price rises above production costs and creates economic rent. But that is not the same thing as increasing the number of reserves.