One of the more disingenuous arguments against increased domestic drilling for petroleum is that it won’t have an impact of the price of fuels for many years. The argument is disingenuous for two reasons. First, it ignores the facts of alternative fuels and renewable-resource energy, which won’t have an impact on the price of fuels for many years. Second, it discounts the impact of commodity futures markets on the current price of fuels at the pump.
What are commodity futures? Basically, they are contracts for the future delivery of a fungible product – - orange juice, cocoa, copper, gold, natural gas being some of the products which are traded in futures markets. Some futures contracts are bought buy entities which actually use the commodity, and others are bought or sold by traders, or speculators, who are betting that they can re-sell the contracts at higher prices or cover sales by buying at lower prices.
By one reliable, recent estimate, speculative trading in petroleum futures now accounts for 70 per cent of the current U.S. trading market. Billions of dollars are, in effect, being wagered on the price of oil.
Traders’ decisions about buying or selling commodities futures are based both on current facts and on assumptions about what will, or will not, happen in the future. You may recall reading about increasing prices of orange juice futures at a time when a freeze impacts Florida orange groves – - in such a case, traders know that the freeze will affect the future availability of orange juice and adjust their pricing decisions accordingly. But commodity traders also base decisions on expectations of what is likely to happen in the future – - for example, whether Florida’s orange groves will remain in production, or whether some will be sold for housing developments, reducing the supply.
One of the important factors which is driving the price of oil futures upward is the prospect of limited supply growth. At this point in time, traders assume that Saudi oil production has or will soon peak; that production will remain uncertain in troubled areas, such as Nigeria; and that the United States will not increase its efforts to drill for oil. The expectation of flat supply creates an upward pressure on the price of oil.
If that expectation changes, then the behavior of traders in oil futures will change. Resolving now to exploit our domestic reserves of petroleum will have an immediate and lasting impact. How much will this impact be? I have seen estimates ranging from a drop of $10 per barrel, to a reduction in spot market price to $100 per barrel or somewhat less. While this won’t bring a return to sub-$3.00 gas prices at the pump, it will provide some price relief and greater stability, both of which the economy needs now.
Related posts:
The Price Of Gas: It’s Supply And Demand, Stupid!
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Obama’s Energy Plan: Changeless, Hopeless, Clueless
This article is cited in Drill Now For New Oil To Bring Down Gas Prices
This article is cited in Oil Futures Digest
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July 10, 2008 at 12:04 pm
[...] reading here} [...]
July 10, 2008 at 12:36 pm
I agree that the market is largely speculative and thus it is driven by perception. As such, if we create the perception that the U.S. is serious about domestic energy production it certainly will drop the price of oil substantially, however my problem is that conservatives are focused exclusively on drilling. This problem requires a sophisticated solution that addresses reall motivations to create alternative energy, the speculators, consumption, and domestic drilling. While I agree with your sentiment that domestic drilling will absolutely make a real and immediate impact, it can’t be the only solution. Here is mine…
http://theeprovocateur.blogspot.com/2008/06/my-plan-to-bring-oil-to-20barrel-and.html
July 10, 2008 at 12:41 pm
mike: Thanks for your comment, and nice work on the plan. I have to disagree that “conservatives are focused exclusively on drilling.” Or that Republicans are focused exclusively on drilling, or that McCain Democrats, such as myself, are focused exclusively on drilling. Follow the links to American Sentinel, American Solutions, the Lexington Project, and see for yourself. – - Jay
July 10, 2008 at 4:10 pm
Greetings my fellow McCain Democrat. I really liked this article. You cut right through the bull. Good job.
July 20, 2008 at 5:25 pm
[...] Why Resolving To Drill Here, Now, Will Lower The Price Of Gas, Now [...]
August 5, 2008 at 3:40 am
Hi Jay! I happen to disagree, however give me feedback if you happen to read my message. There is no reason to assume that the commodity futures market will lower the prices of fuel. The traders that have gotten rich off of their actions may take their money and run and the price may go down. Relying on the market to solve the problem is foolish. The government should regulate or dis-band or force these traders and the oil companies to lower prices. I know, thats just not possible.
Also, drilling here is not a long term solution. Many products are produced from petroleum, not just gas. We need alternative ways of making engine oil, plastics and other items that rely on crude oil. The problems we face require some complex answers, not just simple one liners such as “Drill Here. Drill Now. Pay Less.” We need long term solutions that will get the entire world off of the oil bandwagon forever. Hopefully we will not wait until the oil is gone. Thanks Jay!