Talking Down the Price of Oil — Larry Kudlow
Kurt Brouwer July 16th, 2008
Larry Kudlow pointed to an interesting correlation in this post on his blog [emphasis added]. President Bush removed the executive order banning new oil drilling in the U.S. contintental shelf and oil price futures dropped. Coincidence? Or, causality?
Bravo For Bush (Kudlow’s Money Politic$, July 15, 2008, Larry Kudlow)
In a dramatic move yesterday President Bush removed the executive-branch moratorium on offshore drilling. Today, at a news conference, Bush repeated his new position, and slammed the Democratic Congress for not removing the congressional moratorium on the Outer Continental Shelf and elsewhere. Crude-oil futures for August delivery plunged $9.26, or 6.3 percent, almost immediately as Bush was speaking, bringing the barrel price down to $136.
Now isn’t this interesting?
Democrats keep saying that it will take 10 years or longer to produce oil from the offshore areas. And they say that oil prices won’t decline for at least that long. And they, along with Obama and McCain, bash so-called oil speculators. And today we had a real-world example as to why they are wrong. All of them. Reid, Pelosi, Obama, McCain — all of them.
Traders took a look at a feisty and aggressive George Bush and started selling the market well before a single new drop of oil has been lifted. What does this tell us? Well, if Congress moves to seal the deal, oil prices will probably keep on falling. That’s the way traders work. They discount the future. Psychology and expectations can turn on a dime.
The congressional ban on offshore drilling expires September 30, so that becomes a key date. A new report from Wall Street research house Sanford C. Bernstein says that California actually could start producing new oil within one year if the moratorium were lifted. The California oil is under shallow water and already has been explored. Drilling platforms have been in place since before the moratorium. They’re talking about 10 billion barrels worth off the coast of California…
The drop in the price of oil is probably a coincidence, but we do know that the price of oil is exceedingly high now primarily due to assumptions about the tight supply of oil worldwide. If the U.S. ends it ban on drilling, then a significant new supply of oil will begin coming on line in future years. Today’s price reflects assumptions about the future because oil producers around the world make a daily choice whether to produce oil or leave it in the ground.
The choice to leave it in the ground is based in part on the assumption that future prices will be higher than today’s price. As high prices reduce demand both here and abroad, that alone will impact the world price of oil. And, if oil producing countries believe the U.S. is finally serious about drilling more and also about aggressively developing other energy sources, then producers may begin producing more to take advantage of high prices today. And, that — more supply — would help reduce prices even further. For more on this, see 2 Trillion Barrels? — U.S. Oil Shale — Chart of the Day.
In the past couple of weeks, we have seen a sea change in attitudes here about drilling:
Source: Carpe Diem
We have also seen some viable new strategies for reducing our dependence on oil altogether, see A New Strategy for Energy Independence — T. Boone Pickens.
If you are having trouble understanding why gas prices are soaring, this post should help you understand the basic economics of supply and demand for daily necessities such as gaoline or food:
Why Are Food & Fuel Prices Soaring?
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