In our national debate over domestic oil production, too much time is spent discussing whether more production can lead to oil independence and too little time on the potential impact on liquidity in global oil markets. Lost in the back and forth is the fact that increasing domestic production by any amount increases spare capacity globally and lowers the risk premium. In the world of commodities, hedging oil is the market equivalent of racing at Talladega. As one race car driver observed, “It’s Talladega, short for ‘We’re going to crash, we just don’t know when.’ ”
Instead of car wrecks, however, oil markets constantly face the threat of supply disruptions among the multiple producers, shippers and refiners. Instead of cars being driven around a superspeedway by highly skilled men and women at high speeds with little margin for error, international oil suppliers are trying to choreograph the movement of 90 million barrels a day with an added challenge — the equivalent of a nearsighted Mr. Magoo cartoon character driving against traffic.
