Oil Economics for Liberals

“It will make no difference today, it will make no difference tomorrow, it will make no difference ten years from now.” These were the words of Dan Weiss, a representative of the leftist Center for American Progress last Monday in an interview on CNBC, just one or two short hours after President Bush lifted the executive order banning oil and gas drilling in US waters on the Outer Continental Shelf.

Since liberal economic policy and mythology is incompatible with any objective understanding of free markets, Mr. Weiss may have been surprised to see the headline the very next day: “Oil Prices Post Biggest One-Day Drop in 17 Years” or just five days later: “Oil prices tumble in biggest weekly drop ever”, “Oil plunges faster than ever”. Yes, in the four days after Mr. Weiss said that Bush’s announcement was irrelevant, oil fell more than $15 per barrel.

Now, I don’t blame Mr. Weiss. After all, it was CNBC’s fault for inviting someone to discuss markets whose resume makes it clear that he’s a lobbyist who managed the Sierra Club’s PAC and now is an advocate for “clean energy and climate”. It’s not his fault that CNBC gave him a platform to speak as if he had a clue about economics, commodities trading, or anything else relevant to the way the world really works.

Weiss tried to argue, as liberals do daily, that working toward increasing domestic oil supplies can’t possible impact current prices because it will take years for the oil to be available. On these very pages, just a week ago I explained why that argument is invalid and, from the perspective of anyone who trades or invests, essentially insane. The claim is made so frequently by the left, however, that the rebuttal bears repeating.

If investors believe that something will become more abundant over time, far fewer of them will invest in it now. (Investors are the evil characters sometimes called speculators in the press these days. Many of them are pension funds trying to keep you from being poor in your dotage.)

Stocks work the same way, discounting the future. For example, if a pharmaceutical company has a major proprietary drug which provides a substantial portion of their revenue the stock will (all else being equal) begin drifting down two years or more before the drug’s patent protection lapses (at which time the company’s cash flow will be exposed to competition from generic versions of the drug.) Investors don’t wait until the day the patent lapses and then suddenly say “Oh no, something has just changed!”

I am not claiming that 100% of last week’s tumble in oil was due to Bush’s lifting the executive order. After all Congress still has a ban in place, so Bush’s action is not the same as permitting drilling. However, given polls showing Americans moving toward supporting drilling, the markets clearly believe that the Democrats will be forced to give in and allow some domestic production.

Other factors in the decline in oil prices could include a view that the economy is weak so that demand for oil might decline…although evidence shows only a very small drop in oil usage despite the huge price increase in the past two years. Also, those evil speculators may have jumped in on the short side of the oil trade, especially traders we call “momentum traders” who sell something just because it is going down or buy just because it is going up, assuming there will be yet another trader to sell or buy behind them. (Is anybody going to thank the speculators who knock down oil prices or will the media only look to crucify those who make money as oil prices rise?)

While nobody can ever say with certainty what caused a particular price action in a particular market, it would be ridiculous to believe that Bush’s statement was not the single biggest factor in oil’s plunge. It was the worst possible market reaction for radical environmentalists because it shattered their primary argument against allowing more domestic energy exploration.

One other area in which not just liberals but most of the American public labors under a significant misunderstanding is the idea that if oil prices are this high, everybody involved in the oil and gas industries must be making a fortune. And unfortunately, the influence of the dominant liberal media and Democrats in Congress have created a situation where many Americans get angry about corporations making profit, especially corporations which make things we all need.

So, with that as context, it bears mentioning that the prices of stocks from fully integrated companies (i.e. which own, refine, and distribute oil and petroleum products) to specialized companies such as pure refiners have generally been doing badly for a couple of months, even as oil has risen. Since making a high over $95/share in May, Exxon Mobil has dropped about 14% and is now hovering near its lowest prices in a year.

Valero, one of the largest refiners and marketers of gasoline has dropped 38% in the last three months and 55% in the last nine months.

Although the price of fuel has gone up, both gas stations and refiners have been unable to pass all of the increase on to customers. In other words, to prevent “demand destruction”, refiners and sellers of gasoline have been cutting their profit margins, making less on a gallon of gas than they did when it was less expensive.

Gas stations are doing so badly that just last month, Exxon announced it would sell its 2,220 retail service stations in the US. Independent gas station owners are struggling under the fees charged for processing credit card payments because those fees are a percentage of the value of the sale, effectively rising in lockstep with the price of gas, whereas their profit per gallon of gas has at best been flat and more often lower.

It is unfortunate that it takes news of American companies and business doing badly to make Americans feel somewhat better about the cost of filling our tanks. But if being the bearer of bad news is what it takes to prevent liberal policies, which will only make matters far worse, from being enacted, I can live with that role. It may break the enviros’ hearts not to have a handy villain, but still it gives me no pleasure to point out that even much of the oil industry is suffering from very high oil prices.

All in all, the only way America will extract itself from having extremely high fuel prices is to permit extracting more energy from beneath our feet. Liberal activists either don’t understand this or don’t care. And politicians, even Republicans, are often no better than those activists, equally sheltered from the sometimes harsh realities of free markets. Most politicians and anti-energy, anti-capitalist activists need a serious lesson in economics. Until they get one CNBC should do us a favor and not let them present themselves as experts on anything but their own interests…and maybe not even on that.