From the Streetwise Professor:
And the Clueless Will Rule Us
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:Just one quick question. Speaking of options, if the risk to a portfolio decreases with time ("Never had a negative 20-year total return, blah, blah...) why are long-dated puts more expensive than the shorter ones?
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....MORE
