Oil Prices Sticker Shock!

Well, here's something I don't hear ANYONE talking about. Yesterday, I filled my gas tank with regular unleaded gasoline. It was the lowest price I have seen in months: $3.059. Imagine my astonishment when I drove past the same station today and the price had dropped to $2.939!! A $.12 drop in just a day. (OK, I'm sure you can do math.) For the record, I don't remember the last time I paid less than $3/gallon for gas. It may have been earlier this year, but I don't think so. That price drop is the most staggering drop in price I have ever seen. I'm hearing a lot of talk about how the price of oil is coming down due to decreased demand. I believe this is definitely part of the reason, just judging from my own experience. I definitely stopped driving so much and started planning my routes a lot better so I could get a lot of errands done on one trip. If you multiply my experience by millions, I'm sure there is a lot less demand out there. But I believe that there are other market forces at work. On September 30, the US ban on offshore drilling expired. There is NO will in Congress right now to reinstate it. I believe this is the primary reason for the dramatic drop in price over the last few weeks. And I believe I can prove it!

The Federal Government provides a wide range of information from a variety of sources that we the people can access on the internet. I found a list of crude oil prices going back to 1978. You can follow along by downloading the table of prices at the Energy Information Administration. For our purposes, lets concentrate on July of this year. These numbers are provided on a weekly basis and the price for the week of July 4 was the highest reported ever: $133.60. I'm sure I heard at some point that oil had reached $144/barrel so I think this table is weighted but I believe it will work for our purposes. Let's look at the drop in price from July 4- Sept. 30, 2008. The last price reported before 9/30 is $97.90. This is actually higher than the two previous weeks listed. So at this point it appears that oil has bottomed out and is headed back up. But let's look just at the price drop. The oil price dropped an average of 2.25%/week during that time. That's a total of 27%. Then the ban expires on 9/30. Over the last two reporting periods (the only ones we have at this point), the price dropped an additional $17! That's a drop of 17% in just two weeks, four times the previous rate!! Coincidence?

So what, you may ask. Well. . .think back to early summer when this all started to hit the fan, we were told by Mr. Obama and his Democrat friends that we, "can't drill our way out of this." As I have detailed before on this blog, as soon as the President announced his rescension of the executive order banning offshore drilling, the price started to drop. That is to say, the market reacted. As I said at that time, the market has a way of responding even before the first well has been drilled. The market is anticipating what the price will be and reacting to it. This is market economics at its finest. Don't forget, the price of oil was going back UP when the ban was lifted and then started to drop at an alarming rate. Who knows where the bottom is but I don't think anyone is taking the lifting of the ban into account. Of course, there are many variables at work, just as there were at the time when the price started skyrocketing, but the notion at that time was that there was nothing we could do to lower the price. Here we are just a few months later and the price is dropping.

I'm not sure if the expiration of the ban will result in actual drilling anytime soon, but the fact that Congress is unwilling to reinstate the ban shows that the political winds are changing and it is only a matter of time before the drills are turning. This is another big issue in this election. After initially opposing it, Barack says we can "look at" some offshore drilling. McCain/Palin are all for offshore drilling. The key is going to be the legal challenges that any oil company will face from the various environmental groups who no doubt want to keep the oil from flowing here in the states. (That's why the ban was in place for the last 30 years in the first place!) Now the folks in the middle east are freaking out because they are seeing their profits plummet. Who knows how long the drop will last but it is a fascinating time and a good lesson in market economics. Supply and demand rule the day!