Speaker Nancy Pelosi last Tuesday dismissively referred to pro-oil-drilling
demonstrators chanting “Drill here! Drill now!” as the
“2-cents-in-10-years-crowd.” She may have to revise her insult strategy, since
it seems that some mere pro-drilling posturing by President Bush has already
helped reduce the price of gas.
The “2-cents-in-10-years” slam refers to the anti-drilling
environmentalists’ primary argument that even if we expanded domestic oil
production, it would have only a marginal impact on gasoline prices far into
Increased worldwide oil demand, a weak dollar and increased oil futures
speculation are among the leading factors that have caused crude oil prices to
rocket upward since last summer, reaching a peak of about $136 per barrel in
mid-July. Since then, the price of oil has backed off to about $110 per barrel,
a decline of almost 20 percent. Gasoline prices have also fallen from
mid-July’s national average of $4.11 per gallon to late-August’s $3.73 — a
decline of more than 9 percent.
Why have the prices of oil and gasoline declined so much since mid-July?
It’s hard to know for sure, but let’s consider the factors that caused the
price to spike in the first place.
Americans, who drive about 3 trillion miles per year, do seem to be driving
less and reducing demand for gasoline, according to the latest figures from the
Federal Highway Administration.
Americans drove 4.7 percent fewer miles in June 2008 than June 2007,
and 53.7 billion fewer miles between November 2007 to June 2008 than over the
same period a year earlier — a time when gasoline prices rose from $3.06 to
$4.13. So if less driving leads to lower oil and gas prices, the data don’t
show that relationship.
How about the dollar’s 8 percent rally against the Euro since mid-July?
Historically, the relationship between the dollar and the Euro has been only
weakly correlated with the price of oil. That is, higher-dollar/lower-Euro and
lower-dollar/higher-Euro movements have correlated only about 20 percent of the
time with decreases and increases, respectively, in the price of oil. Recently,
however, this correlation has increased to 57 percent, indicating “a reasonably
high level of common movement,” according to David Gaffen, who writes the Wall Street Journal’s Marketbeat blog. So it is possible
that the dollar’s rise against the Euro may have helped reduce oil prices somewhat
— but to what extent is unclear.
The remaining factor is oil futures speculation — which can be gauged by
so-called “open interest” in crude oil, the number of futures contracts open on
a given day. Since mid-July, crude oil open interest has declined by 100,000
contracts, a sign of heavy liquidation, the president of an energy risk
management firm recently told the Associated Press.
So what happened in mid-July to cause oil speculators to bail out of oil?
Could it have been Bush’s July 14 announcement that he was lifting the 1990
executive order barring the Department of Interior from issuing leasing rights
to explore and drill for oil offshore? If Bush’s announcement was the trigger —
and there doesn’t appear to be any other significant event during that time
that might have caused speculators to rethink their positions — then it’s all
the more remarkable since Bush’s action itself will not lead to more drilling
or a major infusion of new supply.
Not only is there a separate moratorium on offshore drilling that Congress
renews every year — and, so far, the Democrat-controlled Congress has given
little indication that it is seriously considering lifting it — but there’s
“only” an estimated 18 billion barrels of oil in the offshore areas subject to
the leasing prohibitions. At current consumption rates of 7.5 billion barrels
of oil annually, that’s less than a three-year supply of oil for the U.S.
Getting back to Pelosi’s derogatory “2-cents-in-10-years-crowd” comment, it
seems as if it was debunked before she uttered it. Bush’s revocation of the
executive order — which without similar congressional action amounts to little
more than a political statement in favor of increasing the oil supply — has
possibly already reduced the price of gasoline by 38 cents in 30 days.
The mere prospect that the U.S. might get serious about increasing the
supply of oil has sent speculators scurrying for cover. Imagine what would
happen if we actually explored, drilled and produced some of that offshore oil
— which, by the way, could be way more than 18 billion barrels. The U.S.
Minerals Management Service estimated in 2006 that the quantity of undiscovered
technically recoverable oil in the outer continental shelf is between 66.6 to
115.3 billion barrels of oil.
In any event, even if the offshore drilling only reduced the price of oil 2
cents over 10 years, as Pelosi would have us believe, isn’t that better than
the alternative her no-drill policy offers — ever-increasing prices?
As reported by Politico.com, Pelosi’s retort to the protesters’ chant was,
“Right here? Can we drill your brains?” House Majority Leader Steny Hoyer then
chided the protesters that “sophomoric chanting” won’t solve the energy crisis.
That may be true as long as we allow petulant Democrats to run Congress and our