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Mad Money

Collide-a-ScapeBy Keith KloorApril 9, 2009 1:51 AM


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Oil and gas companies are understandably shrewd. If it's not profitable to drill, they won't drill.

They'll wait. They know the sun will rise again. As one economist puts it,

the gas will be there when the economy recovers and prices improve.

So if industry can pull up stakes and wait out the recession, why can't the U.S. Government play the same waiting game when it comes to auctioning offshore drilling leases? Good question.

According to Mike Livermore, the executive director of the

Institute for Policy Integrity at New York University's School of Law, the current plan for selling offshore drilling rights by the Interior Department's Minerals Management Service (MMS)

has failed to value the option of waiting to auction drilling leases.

Because the monetary value of a lease is fixed in time, the government is potentially leaving $600 billion on the auction table, says Livermore. Furthermore,

By failing to account for the potential benefit of waiting to lease drilling rights, the MMS plan essentially values all of the drilling options held by the American public at zero. It's like exercising an executive option at too low a stock price"”we're clumsily hitting the "sell" button before our assets mature, costing ourselves billions.

Hey, maybe we should ask Jim Cramer what he would do.

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