Why the Threat of Drilling for Oil Drives Down Prices
Timothy Birdnow
As usual, Walter Williams gets it:
"White House and congressional attacks on oil speculation do not alter the oil market's fundamental demand-and-supply reality. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil off our Atlantic and Pacific Ocean shores, the Gulf of Mexico and Alaska, not to mention the estimated billions, possibly trillions, of barrels of shale oil in Wyoming, Colorado, Utah and North Dakota. Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil and won't solve today's problems. Nonsense! I guarantee you that if permits were granted to all of our oil sources, we would see a reduction in today's prices. Why? Put yourself in the place of an OPEC member knowing there's going to be a greater supply of U.S. oil in five or 10 years, which might drive oil prices to a permanent $20 or $30 per barrel. What will you want to do now while oil is $120 per barrel? You would want to sell. OPEC's collective efforts to sell more would put downward pressures on current oil prices. The White House, U.S. Congress and environmental wackos, by keeping our oil in the ground, are OPEC's staunchest ally. I wouldn't be surprised at all if we discovered OPEC reciprocity in the forms of political contributions to congressmen and charitable donations to environmental groups."
(Spaceba to the Federalist Patriot)
I made this very argument in 2008 in a piece at Pajamas Media; the Russian-Georgian war ended prematurely because of the drop in oil prices as a result of George W. Bush's opening our oil reserves.
http://pajamasmedia.com/blog/drill-here-drill-now-helped-end-russia-georgia-war/
Now, bear in mind, there was nary a drop of oil drilled, yet prices fell as soon as Bush announced he was recinding his father's ban on offshore drilling. Why? As Dr. Williams points out, better to sell for less now than for a LOT less later. Think about investors; their holdings were purchased at the top of the market, and they were betting for a rise. A possible increase in supply would lower costs, meaning at best they wouldn't profit and quite possibly lose money. It's not about what is coming out of the ground, but what the future holds. That's why it's called a futures market, after all.
It's no different from, say, the housing market; speculators bid the price of housing sky high through the '90's as a result of a number of factors. Yes, changes to the Community Reinvestment Act created the subprime market, which was a huge part of the housing bubble, but there was more; loans could be bundled and sold to investors as a new for of securities. Also, the low interest rates had all sorts of people buying crappy pieces of property to use as rentals. The Clinton Administration's lawsuit against Microsoft burst the tech bubble, and that money was chasing something more substantial than online pet stores; what could be more "real" than real estate? Low interest rates, no-money down financing, sweet tax deductions, the whole enchilada made the real estate market attractive.
I work for a property management company, and we were picking up new clients at a tremendous rate in the last decade. A great many of them were totally inexperienced and undercapitalized, and had seen late-night informercials telling them how easy and cheap it was to make money with rental properties. Very often these people would fail, despite our best efforts; they simply had no money as cushion, and anyone who owns rental properties knows that such a cushion is vital. Tenants stop paying, or things break that have to be fixed, and there has to be money put away for that. Often these investors were suckered by misleading comps on the price they could rent these properties out. We picked up a dozen clients from one company that bought, rehabbed, and sold properties to such suckers, and most of them were quite unhappy with us when we had to tell them they couldn't get the rents they were promised. I was forever explaining to these clients that comps can be misleading - sometimes very misleading. This company that sold them their properties used their own properties as comps...
We only have a few of these people left; most have gone into foreclosure.
At any rate, the bubble burst when a wave of defaults hit the market, largely in the subprime industry, and the prices of housing collapsed. Now, the properties are still there, and are fundamentally no different then they were a couple of years ago. What has changed is the perceived value of them; Nobody is expecting a rise in value, so prices remain moribund. Should there be a sudden uptick in demand the prices would rise. But, despite historic lows in interest rates, there is no more demand. (Actually, interest rates are so low that nobody is lending; banks make more money using that capital in other ways.) The same holds true for oil; demand is up worldwide, and supply is artificially limited by environmental regulations, so speculators invest in oil. They don't see any chance of a major drop in price in the forseeable future. But open some new oil fields and speculators will dump their holdings; it's a good bet prices will drop and they'll lose eventually. The mere THREAT of greater supply yields better prices.
And I suspect the Obama knows it, too, but he wants high gasoline prices. He's on record calling for high prices to drive people to "renewable energy". The trick is to keep prices at a threshold where the public does not rebel.
So, without threats of new drilling prices will remain high. I suspect we'll see a drop next year as the election approaches, then a new spike (assuming that Il Duce is re-elected).
What we should take away from this whole thing is that Americans are woefully ignorant of exactly how the market works. Too many believe the Obama lie that "we have only 2% of the proven oil reserves in the world". That is true if you take the "proven" part, and by proven Obi means ones ready to be drilled today. We actually have three hundred years worth of oil here in America if our consumption does not rise. Problem is, they won't let us go after it. OF COURSE prices continue to climb!
But we are treated to inquisitions of oil companies "price gouging" instead; too many believe this "fat cat" oil exec lie. Too few understand that, perhaps the oil companies have some twenty pound felines, but the government is overburdened with blue wales with whiskers. The real fat cats, the real price gouging, is being done in Washington.
This is a purely artificial problem, created by the obese government. Americans should learn that.
As usual, Walter Williams gets it:
"White House and congressional attacks on oil speculation do not alter the oil market's fundamental demand-and-supply reality. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil off our Atlantic and Pacific Ocean shores, the Gulf of Mexico and Alaska, not to mention the estimated billions, possibly trillions, of barrels of shale oil in Wyoming, Colorado, Utah and North Dakota. Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil and won't solve today's problems. Nonsense! I guarantee you that if permits were granted to all of our oil sources, we would see a reduction in today's prices. Why? Put yourself in the place of an OPEC member knowing there's going to be a greater supply of U.S. oil in five or 10 years, which might drive oil prices to a permanent $20 or $30 per barrel. What will you want to do now while oil is $120 per barrel? You would want to sell. OPEC's collective efforts to sell more would put downward pressures on current oil prices. The White House, U.S. Congress and environmental wackos, by keeping our oil in the ground, are OPEC's staunchest ally. I wouldn't be surprised at all if we discovered OPEC reciprocity in the forms of political contributions to congressmen and charitable donations to environmental groups."
(Spaceba to the Federalist Patriot)
I made this very argument in 2008 in a piece at Pajamas Media; the Russian-Georgian war ended prematurely because of the drop in oil prices as a result of George W. Bush's opening our oil reserves.
http://pajamasmedia.com/blog/drill-here-drill-now-helped-end-russia-georgia-war/
Now, bear in mind, there was nary a drop of oil drilled, yet prices fell as soon as Bush announced he was recinding his father's ban on offshore drilling. Why? As Dr. Williams points out, better to sell for less now than for a LOT less later. Think about investors; their holdings were purchased at the top of the market, and they were betting for a rise. A possible increase in supply would lower costs, meaning at best they wouldn't profit and quite possibly lose money. It's not about what is coming out of the ground, but what the future holds. That's why it's called a futures market, after all.
It's no different from, say, the housing market; speculators bid the price of housing sky high through the '90's as a result of a number of factors. Yes, changes to the Community Reinvestment Act created the subprime market, which was a huge part of the housing bubble, but there was more; loans could be bundled and sold to investors as a new for of securities. Also, the low interest rates had all sorts of people buying crappy pieces of property to use as rentals. The Clinton Administration's lawsuit against Microsoft burst the tech bubble, and that money was chasing something more substantial than online pet stores; what could be more "real" than real estate? Low interest rates, no-money down financing, sweet tax deductions, the whole enchilada made the real estate market attractive.
I work for a property management company, and we were picking up new clients at a tremendous rate in the last decade. A great many of them were totally inexperienced and undercapitalized, and had seen late-night informercials telling them how easy and cheap it was to make money with rental properties. Very often these people would fail, despite our best efforts; they simply had no money as cushion, and anyone who owns rental properties knows that such a cushion is vital. Tenants stop paying, or things break that have to be fixed, and there has to be money put away for that. Often these investors were suckered by misleading comps on the price they could rent these properties out. We picked up a dozen clients from one company that bought, rehabbed, and sold properties to such suckers, and most of them were quite unhappy with us when we had to tell them they couldn't get the rents they were promised. I was forever explaining to these clients that comps can be misleading - sometimes very misleading. This company that sold them their properties used their own properties as comps...
We only have a few of these people left; most have gone into foreclosure.
At any rate, the bubble burst when a wave of defaults hit the market, largely in the subprime industry, and the prices of housing collapsed. Now, the properties are still there, and are fundamentally no different then they were a couple of years ago. What has changed is the perceived value of them; Nobody is expecting a rise in value, so prices remain moribund. Should there be a sudden uptick in demand the prices would rise. But, despite historic lows in interest rates, there is no more demand. (Actually, interest rates are so low that nobody is lending; banks make more money using that capital in other ways.) The same holds true for oil; demand is up worldwide, and supply is artificially limited by environmental regulations, so speculators invest in oil. They don't see any chance of a major drop in price in the forseeable future. But open some new oil fields and speculators will dump their holdings; it's a good bet prices will drop and they'll lose eventually. The mere THREAT of greater supply yields better prices.
And I suspect the Obama knows it, too, but he wants high gasoline prices. He's on record calling for high prices to drive people to "renewable energy". The trick is to keep prices at a threshold where the public does not rebel.
So, without threats of new drilling prices will remain high. I suspect we'll see a drop next year as the election approaches, then a new spike (assuming that Il Duce is re-elected).
What we should take away from this whole thing is that Americans are woefully ignorant of exactly how the market works. Too many believe the Obama lie that "we have only 2% of the proven oil reserves in the world". That is true if you take the "proven" part, and by proven Obi means ones ready to be drilled today. We actually have three hundred years worth of oil here in America if our consumption does not rise. Problem is, they won't let us go after it. OF COURSE prices continue to climb!
But we are treated to inquisitions of oil companies "price gouging" instead; too many believe this "fat cat" oil exec lie. Too few understand that, perhaps the oil companies have some twenty pound felines, but the government is overburdened with blue wales with whiskers. The real fat cats, the real price gouging, is being done in Washington.
This is a purely artificial problem, created by the obese government. Americans should learn that.
posted by Timothy Birdnow | 5:34 AM
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