After trading at a record high of $147 a barrel Friday, the price of oil saw its largest one-day drop since the 2003 beginning of the Iraq war on Tuesday, falling $6.44 a barrel. Wednesday, it fell another $3.71, to $135.03, and at one point was trading as low as $132. So what happened? As is usually the case with markets, a variety of factors caused this dramatic drop. According to the Associated Press, the Energy Information Administration announced that U.S. crude-oil supplies rose by 3 million barrels; beleaguered banks have been selling off valuable energy contracts to pay for other debts; and there’s even some speculation that computer programs used by Wall Street may create a “cascading effect” once prices start to drop. But bizarrely, the AP didn’t mention that on Monday — again, the day of the single biggest one-day drop in oil prices in five years — President Bush removed the executive order imposing a moratorium on offshore drilling in the United States. To think that this dramatic and unexpected move by the Bush administration didn’t have a significant effect on oil prices is folly. Even Democrats admit that relatively small margins in oil production could have a huge impact on prices. “If they [Saudi Arabia] produced half a million barrels more oil a day the price would come down a very significant amount and, at the same time, it would stop the speculation that keeps driving up the price of oil,” Sen. Charles Schumer (D., N.Y.) said on the Senate floor Wednesday.
Where to begin with all the silly implied assertions here? Sure a price decline equal to $15 a barrel begs an explanation. But how does Hemingway know that what the EIA has described cannot account for all of this $15 decline? Secondly, the fact that President Bush has removed his executive order does not imply that companies are free to do offshore drilling. Congress has to act as well. So at best, the decision by Bush (which likely surprised no one) only increased the probability that this ban will be lifted and maybe by not that much. Finally, if the ban were lifted this year, the extra oil on the world market in 2009 would be zero. OK, maybe we’d have a little more oil on the world market by 2020. But as far as the price of oil today or even three months from now, my guess is that it had no role in this drop in oil prices. To suggest it had a significant effect on oil prices is the real folly.
Update: Why does this not surprise me – Lawrence Kudlow is predicting even larger oil price declines:
Today, at a news conference, Bush repeated his new position, and slammed the Democratic Congress for not removing the congressional moratorium on the Outer Continental Shelf and elsewhere. Crude-oil futures for August delivery plunged $9.26, or 6.3 percent, almost immediately as Bush was speaking, bringing the barrel price down to $136 … if Congress moves to seal the deal, oil prices will probably keep on falling. That’s the way traders work. They discount the future. Psychology and expectations can turn on a dime.
Post Hoc Ergo Propter Hoc from the same fellow that predicted that the invasion of Iraq would lead to oil prices being $12 a barrel!