Politicians who oppose opening up offshore areas and federal lands now off limits to energy exploration forget this simple fact of economic life. They assume that oil prices, for example, will not be affected until oil from these areas actually hits the market. They, of course, are incorrect.
That point is made by Don M. Chance, a professor of finance at Louisiana State University, in an August 26 op-ed in Investor’s Business Daily. The entire article warrants reading. But we’ll highlight the following here:
Certainly increased drilling will not bring an immediate increase in the supply of oil. But many people, even so-called experts, believe that the effect on the pump price would not be felt until the oil is actually at the pump, possibly years later.
In fact, the price will fall well before the first hole is drilled. Even the possibility of increased drilling will bring down the price of oil. It already has.
Almost everyone knows that supply and demand determine price in a market. But that knowledge seldom goes beyond understanding how supply and demand themselves are determined.
The belief that the current quantities demanded and supplied are the sole determinants of price misses an important point. Both current and expected future demand and supply interact to determine the quantity demanded and supplied in the current marketplace…
If intentions are not backed by actual drilling, prices will rise. The market will tolerate a period of discussion, but if the drilling naysayers win the debate, prices will head up and sharply. The rise and fall of oil prices are likely to mirror this debate.
Speaker Nancy Pelosi is arguably the most powerful woman in America. But if she wants to see her real power, she should bring the drilling issue to a vote. Only a Fed chairman could have so much impact on market prices.
Excellent points that are too often forgotten in the current energy debate.
Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council
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