Thursday, July 17, 2008

Bush lifts ban on U.S. offshore drilling, prices drop - Update

Test: President Bush lifted an executive order that banned offshore drilling for oil and gas along much of the coastline of the US. Oil prices dropped over the next two days. Did ending the ban cause the drop in prices? Should it have? Bush lifts presidential ban on U.S. offshore drilling - CBC Prices in market exchange reflect the expectations of future prices of the underlying commodity. If people expect the future price of crude oil to drop they will pay less for the "future" that is traded on the exchanges and in many cases for the price for immediate delivery. But Senate Majority Leader Harry says it won't help. The Hill:
Reid criticized President Bush’s announcement earlier in the day to rescind a longstanding executive order banning offshore oil drilling, saying it was a gift to the oil companies that are not exploring for oil in 68 millions of acres available to them.
Distinguished Senator Reid can ignore economics, more likely he know nothing of its power to predict. This is the Econ 201 Supply and Demand. But he sends us the bill for his ignorance. And the "not exploring 68 x 10^6 acres" is a red herring. The records don't show the acres being tested, etc., only those in production. Much of the acreage is going through the processes of deciding if, where and when to drill and produce. And his spokesminions say it will take too long to affect prices in the near term. Wrong. The impact on near-term prices is lower for longer term expected commodity prices drops, but it still exists, like we saw this week. The answer to both questions is YES. Update. There are additional possible factors. Federal Reserve Bank Chairman Bernanke said the economy is weakening. This bad news leads to good news. The weaker economy will lessen the demand for gasoline and petroleum products and lower the price of crude oil. This news probably influenced the drop in oil prices. Thanks to Hugh Hewitt at Townhall

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