Earlier today I noted that the asinine commentators on CNBC were discussing the question of whether the energy bull market had run its course. This after two consecutive days of oil prices falling. TWO DAYS! Granted, oil dropped 7% over the past two days, but are you kidding? Two days marks an enduring trend? Ironically, today was the first day that it cost me more than $50 to fill up my 12-gallon tank ($4.15/gallon this morning). What a rude shock that was.
President Bush’s lifting of the executive order banning offshore drilling was and is a good thing. Although, it should be seen in context with a wider energy policy which seeks to develop and exploit new technologies, expands domestic onshore oil production, and diversifies our energy portfolio by bringing online more options like nuclear energy. This clearly should be coupled with conservation, even if the president will not command Americans to conserve.
In the last few months, there have been stories that indicate that the late oil price boom has not been driven solely by supply and demand, but rather by speculation in the futures market. These stories have noted that as oil prices soared, non-OPEC nations have dramatically increased production and more than met the demand. In short, supply has been outstripping demand. Simple economics confirms that this is probably true. If the commodities market, taking into account the future price of oil bets that oil prices will increase, more investors will enter the market and drive the current price up. In return, producers will increase production. At the same time, because oil consumption is extremely inelastic demand will decrease only marginally. The result is that there will be a surplus in production, which nonetheless will demand a price higher than the equilibrium point would dictate. Granted, demand is booming as previously second and third world nations modernize (India and China, conspicuously), the global demand for oil increases. But, growing demand does not tell the whole story.
The point, of course, is that effect prices at the pump today, one must craft a policy which will have an effect on the futures market. One way to do that is to commit to greatly increasing future supply. This is what the president has allowed oil companies to do. The big question in my mind is whether the oil companies will take advantage of the increased availability of drilling opportunities. Time will tell. If it appears that the United States is poised to enter the world oil market on a large scale in five to ten years, that should suffice to drive futures prices down and the price at the pump will follow. How much is anyone’s guess. Right now, I would be happy if it just stopped going up.
Now, if Pelosi and company will lift the Congressional ban, we might see some relief at the gas pump.