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Drill, Barry, Drill!

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Motor fuel prices—gasoline, to the ordinary folk—have risen to a headline-making level. Many people who mock those with doubts about the current President’s birth status are willing believers in some shadowy conspiracy by oil speculators. Scapegoating speculators is an indication of ignorance.

The short version is that speculation may be able to rise prices for a short time. But it cannot keep prices up. That’s because the method speculators use is futures contracts, which are paper agreements to deliver some physical commodity on a given date at a given price.

Speculators can’t take physical delivery. Even if they have the money, there’s nowhere to put the oil. Our storage tanks are full. Which is a product of past speculation; people bought oil and held it thinking the price would rise. It did, and that led to more oil being delivered than was consumed.

That’s the law of supply and demand at work. When prices are rising, it inspires greater supply and reduces demand. And fills the oil storage tanks.

The cost of transport and storage are factors which the speculation-conspiracy types must ignore. If the price oil was the product of many related but not mutually-controlled factors, there would be no conspiracy. A puppetmaster needs all his strings attached to make his puppet dance.

But the conspiracy view is appealing. It’s effective rhetoric. And setting aside the “nuances” of how futures contracts operate, there’s widespread ignorance of the shape of the world’s oil industry:

The president now says his administration is pushing major oil producers to increase oil output in an effort to lower prices. What he really needs is to have someone tell the government of the world’s third largest oil producer to boost output. In case he is unaware, that oil producer is the United States.

Zing.

Barry probably is unaware. He may have been briefed, but the facts don’t fit his beliefs.

The easiest, fastest way to lower the price of gasoline is to announce policy changes that increase the flow of oil. Even though it takes time for new production to reach the market, the current price is driven by the futures market.

Drill now and make the speculators try to take delivery of the extra oil. They will not be able to, because the tanks are full. The price drops and everyone smiles. Everyone except the treehuggers. And they don’t smile much anyway.

Even if someone’s priority was to screw the evil speculators (instead of making life easier for the common folk), drilling now gets it done.

Comments

It would also help the common man if the industry were able to build a new refinery. The U.S. has not issued a permit to build one since 1976. Power outages on Tuesday shut down several refineries, while other are down at his time for maintenance. When refining capacity is affected, it makes all involved parties nervous, and price increases follow.